April 13, 2014 8:33 pm
ECB policy makers plot QE road map

By Claire Jones in Frankfurt

A European Central Bank policy maker has offered hints on how the eurozone’s monetary guardians would embark on an asset-buying, or quantitative easing, programme to stave off low inflation.

Benoît Cœuré, a member of the ECB’s executive board who is seen as one of the officials closest to president Mario Draghi, indicated at the International Monetary Fund’s spring meetings in Washington that the central bank could buy a broad range of assets with maturities of up to 10 years.

While the ECB has used the US meetings to signal that eurozone policy makers would cut interest rates before resorting to QE, further falls in inflation would force the central bank to buy bonds outright.

At 0.5 per cent, European inflation is now about a quarter of its target of just below 2 per cent.

Mr Draghi said this month that the 24 policy makers on the governing council were united in support of using extraordinary monetary easing, such as QE, to address a prolonged period of low inflation, which risks extinguishing the currency bloc’s economic recovery by holding back demand and stoking debt problems in its troubled periphery.

However, despite the display of unanimity, mass buying of bonds remains an option fraught with political risk and technical difficulties.

If the ECB were forced to resort to QE, Mr Cœuré’s comments indicate any programme would include private sector as well as public debt, and would involve buying instruments which mature in anything from one to 10 years.

He also suggested the ECB could buy different assets in different member states to take into account divergences between lenders and capital markets across the region. The aim of any programme would be to lower the cost of borrowing by similar rates across the region, which has suffered from financial fragmentation.

“Asset purchases in the euro area would not be about quantity, but about price,” he said.

Though politically difficult, purchases of government bonds are a relatively simple option technically.

More technically complex but politically palatable is buying private sector debt, such as asset-backed securities, which the ECB would struggle to price.

The market for instruments the central bank would like to buy, such as asset-backed securities created from loans to smaller businesses, is also relatively small.

Signalling the ECB would buy longer-term debt, Mr Cœuré said on Sunday: “In practice, purchases would naturally be linked to the interest rate maturities that are most important for firms’ and households’ investment and consumption decisions. In the euro area, this tends to be the intermediate to longer part of the yield curve.”

Hinting that the central bank could buy assets other than government bonds, Mr Cœuré added: “When financial markets are highly integrated with a high degree of substitutability between assets, purchases in one asset class, such as government bonds, are more likely to affect term premia across all asset classes.But given the segmentation of euro area financial markets, this effect cannot just be assumed.”