ECB ponders large-scale bond buying

Eurozone's low inflation rate, slow recovery prompt consideration of quantitative easing

The possibility of large-scale bond purchases by the European Central Bank has been broached in recent days as policymakers grapple with alarmingly low inflation and a muted economic recovery from recession.

Even though the topic appears to be up for discussion, analysts say the ECB may never take such a drastic step for both political and practical reasons despite the fact others that others, including the US Federal Reserve, have used such purchases to try to stimulate their economies.

But the mere fact that several top ECB officials are talking about asset purchases represents a bit of a shift. Executive board member Peter Praet mentioned the possibility of purchasing assets during an interview with the Wall Street Journal. Vice-president Vitor Constancio did the same on Wednesday.

Such purchases, dubbed quantitative easing or QE by economists, involve using newly created money to buy financial assets such as bonds from private-sector institutions. That can drive down longer-term interest rates, increase the supply of money in the economy and boost growth.

For years, ECB officials said very little about QE even though other central banks took the plunge. The idea is met with scepticism in Germany, in particular, where many regard it as potentially inflationary and unduly rewarding those indebted governments which have failed to take the necessary steps to shore up their economies.

The catalyst to the current discussion about QE was the fall in the eurozone's inflation rate to 0.7 per cent in the year to October, way below the ECB's goal of just under 2 per cent.

That raised a new worry for a region that has grappled with a debt crisis and a weak economy for years: does Europe face outright deflation - a corrosive fall in prices that has afflicted Japan for years? Or is the drop caused by benign factors such as lower fuel prices, and efforts of indebted countries such as Greece, Portugal and Spain to lower their relative prices to make their economies competitive again?

ECB president Mario Draghi has said little publicly about potential asset purchases aside from a comment that "there are a whole range of instruments that we can activate if needed".

There are other steps the bank could take to get more money in circulation. It could cut the cash amounts banks are required to keep on reserve at the ECB.

The rate for bank deposits at the ECB could be dropped to below zero, which could get them to loan money rather than hoard it.

It could make more cheap, long-term loans to banks, after two earlier ones that handed out more than 1 trillion ($1.34 trillion).

Draghi has said the ECB could cut the interest benchmark. There is little room to do that, however after it was reduced to a record low of 0.25 per cent this month.

- AP