ECB would buy assets should inflation worsen

European Central Bank Vice President Vitor Constancio signaled that large-scale asset purchases are the next step policy makers are prepared to take if the inflation outlook worsens.

“How would the ECB react, should the risks of a protracted period of low inflation materialize?” Constancio asked in a speech in Athens on Thursday. “The ECB stands ready to deploy additional unconventional instruments, should the likelihood of this scenario increase. The policy response would involve a broad-based asset-purchase program.”

ECB President Mario Draghi unveiled a package of measures on June 5 to shield the euro area from deflation and rekindle growth that includes targeted loans to banks and a negative deposit rate. The 18-nation economy is struggling to sustain a recovery amid weak credit growth, high unemployment and inflation at about a quarter of the ECB’s goal.

Bundesbank board member Andreas Dombret, in an interview with Bloomberg Television on Friday, urged banks to drive the revival of Europe’s market for asset-backed securities. Policymakers have identified that asset class as vital for a revival of lending to companies and households, with Draghi holding out the prospect of ECB purchases of ABS later this year.

“The ECB has left no doubts about its resolve to avoid any downward turn in the euro area inflation developments, because such developments would be extremely harmful,” Constancio said in the speech that was interrupted by protesting Greek bondholders who suffered losses in the country’s debt restructuring in 2012. [Bloomberg]