ECONOMY

New ECB measures mark new policy phase, says Constancio

The European Central Bank is embarking on a new policy phase with its latest stimulus measures, ECB Vice President Vitor Constancio said, promising to steer the central bank’s balance sheet “significantly higher”.

Since the summer, the ECB has cut interest rates to record lows, offered banks new long-term loans, and announced plans to buy private sector assets – a program with which it aims to stimulate lending to support the flagging euro zone economy.

Constancio said in the text of a speech released on Wednesday that “the measures decided in the past few months mark a new phase in the ECB’s approach.”

“With these new measures, the Governing Council demonstrates that we are ready to actively steer the size of our balance sheet toward significantly larger levels, so as to further ease the stance of monetary policy,” he added.

The ECB’s stimulus puts it on a different policy course to that of the U.S. Federal Reserve, which is preparing to stopper the supply of cheap money that has been helping it revive the US economy.

Constancio repeated the ECB’s position that its policymaking Governing Council is “unanimous in its commitment to using additional unconventional instruments within its mandate” should it become necessary.

However, Bundesbank chief Jens Weidmann, a member of the Council, said in a newspaper interview released on Tuesday that this commitment “is not meant to imply a willingness to immediately fire whatever weapon happens to be in the arsenal”.

Stressing that the economic recovery in the euro zone is “still weak and fragile”, Constancio said the period of very low inflation levels the bloc is experiencing “raises serious concerns”.

Euro zone inflation slowed to 0.3 percent last month – far below the ECB’s target level of just under 2 percent over the medium term.

To stimulate lending and support the economy, the ECB plans to buy reparceled debt known as asset-backed securities (ABS) as well as covered bonds, secured on solid assets such as property.

Constancio said the stock of covered bonds eligible for purchase by the ECB amounted to about 600 billion euros ($760 billion). Around 400 billion euros of ABS qualify for purchase by the ECB under its new plan, he added.

“We are, of course, aware that the amounts that we will be able to buy will be lower than the theoretical amount,” he said.

The ECB plans its ABS purchases to include such reparceled debt from Greece and Cyprus, even though this does not meet the eligibility criteria to qualify as collateral for its regular refinancing operations.

The plans to buy ABS have drawn sharp criticism from officials in Germany.

Constancio sought to play down concerns about buying ABS from Greece and Cyprus, saying that “through risk mitigation measures, such as demanding overcollateralization and considerably limiting the amount of each issue that can be bought, we achieve risk equivalence with purchases from jurisdictions that have ratings above the minimum”.

“The majority of the combined stock of ABSs and covered bonds is not held by banks and our purchases are not aimed at buying these securities mostly from banks,” he added.

“Nevertheless, in the present environment, direct purchases of private assets by the central bank can also support banks on the capital side.” [Reuters]