The European Central Bank (ECB) left interest rates unchanged and promised to continue its own version of quantitative easing (QE) until at least March 2017.
On Thursday, the ECB left the main lending rate at 0%, the rate paid on deposits left overnight at negative 0.4% and the marginal lending facility at 0.25%. ECB President Mario Draghi pledged to keep rates at historic lows “for an extend period of time.”
Moreover, the ECB will continue to move ahead with monthly asset purchases of €80 billion ($90 billion). These monthly acquisitions will take place until at least the end of March 2017. The ECB is already warning that it may actually go beyond the date based on its inflation targets.
It is clear that the ECB’s bond-buying initiative isn’t working. It has kept rates in subzero territory and has been purchasing bonds for 18 straight months. Yet, the eurozone economy remains sluggish, debt is still rising substantially and the euro continues to be debased.
With that being said, Draghi pledged that monetary easing would be installed if the inflation outlook “warranted” it.
“I would say there is no question about, as I think I’ve said at other times, the will to act, the capacity to act and the ability to do so,” Draghi said. “If warranted, we will act by using all the instruments available within our mandate.”
Draghi also called upon eurozone governments to enact stimulative fiscal policies to “support the economic recovery.”
Despite its intentions of trying to spur economic growth, the ECB is actually losing money on its bond purchases. Last month, it was reported that 20 percent of the corporate bonds it bought will lose money throughout their maturity. Moreover, since one-third of all global government bonds are negative-yielding then the ECB’s other bond acquisitions will lose money, too (SEE: ECB buying money-losing bonds to stimulate eurozone economy).
It was also reported Thursday that the ECB could run out of bonds to buy as early as November. The Financial Times reports that the ECB may have purchased every dollar of eligible debt that is available on the open market in the next couple of months.
Here is what the newspaper is reporting:
The mechanics of the ECB’s quantitative easing project means banks and investors believe the central bank cannot keep on buying €80bn of bonds a month as planned — or extend quantitative easing — unless it relaxes rules about what it can buy.
With the eurozone’s recovery proving relatively lacklustre, the ECB has vowed to continue QE at least until March and many economists expect it will be forced to prolong the programme beyond that date.
But credit analysts at banks including Citi, HSBC, Bank of America Merrill Lynch, BNP Paribas and JPMorgan and investors such as Pimco all say the €1.6tn programme is fast approaching a wall, perhaps as early as this year. The trouble is that no one outside the ECB knows how close the wall is.
Citi believes the squeeze is so severe that the ECB will run out of German paper to buy in November, although BofA thinks the programme can run unaltered until the end of the year.
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