ECB to begin ABS purchase programme in October

The European Central Bank (ECB) has confirmed it will begin the purchase of asset-backed securities (ABS) in a new programme as it looks to facilitate credit flows into the euro-zone economy.

The announcement comes only days after the bank confirmed BlackRock, the world’s largest asset manager, was advising the bank on the creation and sustainability of such a system.

In a statement today, ECB president Mario Draghi said the euro system would purchase a “broad portfolio” of ABS which would consist of non-financial debt.

This would likely include the purchase of regular and commercial mortgage-backed securities and will not include bank loans or government bonds.

The programme will begin next month, with further details expected after the ECB’s governing council meeting on 2 October.

“The newly decided measures, together with the targeted longer-term refinancing operations (TLTRO) which will be conducted in two weeks, will have a sizeable impact on [the ECB’s] balance sheet,” Draghi said.

“[The programme] reflects the role of the ABS market in facilitating new credit flows to the economy and follows the intensification of preparatory work on this matter.

“In parallel, the Eurosystem will also purchase a broad portfolio of euro-denominated covered bonds issued by monetary financial institutions (MFI) domiciled in the euro area.”

According to the ECB, MFIs can be defined as institutions such as central banks, commercial banks and money market funds.

ABS purchases are likely to ease credit markets in the euro area and intensify the supply of money, which should fuel inflation, in a similar vein to the quantitative easing seen in the US, UK and Japan.

According to Eurostat, the euro zone’s statistics office, inflation in the monetary union was 0.3% in August having fallen from 1.3% in 12 months.

Alongside the central bank’s bid to increase the supply of money into the euro-zone, Draghi also announced the lowering of interest rates across the monetary union.

The main refinancing rate has been reduced by 10bps to 0.05% and similarly the marginal lending rate reduced to 0.3%.

The deposit rate at the ECB has been further pushed into negative territory, reducing 10bps to negative 0.2%.

According to hedge fund CQS, any ABS purchasing programme would compliment the central bank’s TLTRO programme.

Neil Williams, chief economist at Hermes Investment Management, said the move and rate cut was too late to remove the risk of deflation.

“The ECB’s private asset purchases may help, but the amounts are small, and any benefit will fall more to the bigger, core members, Germany, France and Italy, than the periphery.

“Far more useful would’ve been the ‘bazooka’ of unlimited sovereign quantiative easing,” he said.

In the immediate aftermath of the announcement, the euro fell in value against the US dollar, and the yield 2-year German bonds moved further into negative territory.

The yield on 2-year French sovereign bond fell into negative territory.