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ECB Leaves Door Open For QE After Cutting Interest Rates, Announcing New LTRO Package

By Neils Christensen of Kitco News
Thursday June 5, 2014 9:57 AM

(Kitco News) - The European Central Bank left the door open for further monetary-policy action, including the option of purchasing asset-backed securities.

“The ECB would consider purchasing simple and transparent asset-backed securities,” said ECB president Mario Draghi in the opening statement of his monthly press conference.

The much-anticipated press conference followed the ECB’s announcement that it cut its main refinancing rate by 10 basis points to 0.15%, its marginal lending facility rate by 35 basis points to 0.45% and introduced a negative deposit interest rate of minus 0.10%.

“The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate should it become necessary to further address risks of too prolonged a period of low inflation,” he said.

Thursday’s interest rate cuts were only a part of the package the ECB created to boost lending within the eurozone. At the start of the press conference, Draghi said the central bank will suspend the weekly fine-tuning of the sterilization operations of its Securities Markets Program.

During the press conference Draghi said in September and December the central bank will conduct two targeted long-term refinancing operations for a total amount of EUR400 billion. The new TLTROs will mature in September 2018.

Draghi said the new TLTROs were created to specifically promote lending to boost and support the real economy as they are targeted for the non-financial private sector, excluding loans to households for house purchases.

In another step, Draghi said the central bank would intensify its preparatory work, developing a plan to purchase asset-backed securities. During the press conference Draghi was asked why the Governing Council didn’t just move forward with it quantitative easing program.

“We think this is a significant package but are we finished yet? No we are not,” he said in reply.

The fourth step, Draghi announced the central bank would continue conducting is main refinancing operation as a fixed-rate tender procedure with full allotment “for as long as necessary” or at least until December 2016.

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The ECB took these unprecedented steps as inflation remains stubbornly low, Draghi said. Although inflation remains a concern, Draghi added the governing council doesn’t see a risk of deflation.

“We are reacting to the risk of a too-long a period of prolonged low inflation,” he said during the question and answer portion of the press conference.

In an update of staff projections, the central bank now expects annual gross domestic product for 2014 to grow by 1.0%, down from March’s estimate of 1.2%. For 2015 the ECB is expecting to see growth of 1.7%, up from March’s estimate of 1.5%; 2016 growth estimates remained unchanged at 1.8%.

Looking at price-pressure expectations, the ECB is expecting inflation to rise 0.7% in 2014, down from March’s estimate of 1.0%. Inflation in 2015 is expected to rise 1.1%, down from March’s estimate of 1.3%, and 2016 inflation is expected to rise 1.4%, down from March’s estimate of 1.5%.

Draghi also reiterated the Governing Council sees that price stability risks are broadly balanced over the medium term. However the central bank will continue to “closely monitor the possible repercussions of geopolitical risks and exchange rate developments.”

Although there is doubt about the state of the European economy, Draghi said that the Governing Council is confident the measures they have announced will help promote growth.

“Don’t forget, the recovery is still ongoing. The recovery is low and fragile but it’s there,” he said.

By Neils Christensen of Kitco News; nchristensen@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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