| WASHINGTON, April 12
WASHINGTON, April 12 The European Central Bank
could not rely solely on purchases of asset-backed securities
(ABS) if it resorts to unconventional steps to boost inflation,
given the limited supply of the securities, ECB President Mario
Draghi said on Saturday.
If the ECB starts injecting money into the economy using
asset purchases, it is expected to choose a mix of government
and private assets, including ABS, which collapsed during the
financial crisis and are still recovering.
"The present size of the ABS market is about 100 billion
(euros) so it is relatively small," Draghi told a news
conference in response to a question on how useful the ABS
market could be in the ECB's unconventional policy measures.
"We may even consider other unconventional measures."
Speaking on the sidelines of the IMF-World Bank spring
meetings in Washington, where the issue of weak euro zone
inflation took center stage, Draghi said bond purchases had to
be guided by European Union law and take into account European
companies' preference for financing themselves through bank
loans rather than issuing bonds.
"We have to have these two dimensions in mind when we design
a programme," he said.
The ECB has twice embarked on bond purchases, first buying
up covered bonds used to back mortgages and then purchasing
limited sovereign bonds to keep markets turning over during the
worst of the financial crisis.
But it has never ventured into pumping money into the
financial system via bond purchases, something which is now on
the table as inflation veers dangerously low.
Other ECB officials attending the Washington meetings,
including Vice President Vitor Constancio, also said that the
ECB would look at all instrument classes, not only private
A Eurosystem official, speaking on condition of anonymity,
said this referred to purchases of government bonds on the
market because sovereign bonds were the only market deep and
liquid enough to make the required impact.
But it was not obvious which bonds to buy, the official
said, because while buying Greek or Portuguese paper could help
tame deflation there, the falling consumer prices in these
countries were part of a natural adjustment of their economies
to become more competitive, and were actually welcome.
Buying German bonds, on the other hand, could boost overall
euro zone inflation more quickly, because Germany, the euro
zone's biggest economy, had the greatest impact on the overall
consumer price index, the official said.
Draghi said it was premature to discuss if the bank would
first decide to use its remaining room for rate cuts or move
directly to unconventional measures if inflation data again
turned out to be lower than expected.
The ECB wants to keep inflation below but close to 2 percent
over the medium term, but consumer price growth slowed to 0.5
percent year-on-year in March after staying in what Draghi
called a "danger zone" of below 1 percent since October.
Low inflation is a problem not only because there is a risk
it could turn into a stubborn cycle of falling prices, or
deflation, but also because it makes it harder for euro zone
countries to reduce huge public debt and become more competitive
in the global economy.
"We have made an assessment in March and the profile, the
inflation path that was projected didn't grant decision-making
by the (ECB) Governing Council at that time," Draghi said.
"What drives the Governing Council to decide are two things:
one is an unwanted tightening of monetary financial conditions
and the second is deterioration of our medium-term outlook."
Unwanted tightening of monetary conditions meant, for
example, a further strengthening of the euro exchange rate.
"In a sense, if you want our monetary policy to remain as
accommodative as it is today, a further strengthening of the
exchange rate - I don't want to give you a level where we will
act or not, I am giving you an orientation - would require
further monetary policy stimulus," he said.
A deterioration of the medium-term outlook could happen if
inflation data for April or May were to be weak again, diverging
from the bank's main scenario that price growth will gradually
pick up towards 2 percent over the next two years.
Constancio has said that the April inflation data would be
key to a decision whether to start unconventional easing, while
Governing Council member Ewald Nowotny said he expected the ECB
to wait until its June meeting with a decision because the bank
would then also have new economic growth forecasts.
(Reporting by Jan Strupczewski; Editing by Paul Simao)