Last Thursday was the 68th birthday of Mario Draghi, but at the central bank's new headquarters in Frankfurt am Main, Germany, it was the ECB president who delivered the gift surprise to the markets when he suggested that the quantitative easing (QE) programme of buying bonds in the markets, which is officially called "non-standard monetary policy measures," would likely be ramped up. Meanwhile ECB data on interest rates show that Irish rates are above equivalent rates in Italy and Spain.

 

The European Central Bank's current QE programme involves buying about €60bn worth of bonds monthly with the programme due to expire in Sept 2016 after the creation of €1.1tn, while banks can additionally borrow at historically low rates.

Draghi announced Thursday that the purchase programme's issue share limit would be increased from the initial limit of 25% to 33%. This allows the Bank to buy for example more German bonds without Germany having to issue new debt.

The ECB president said that a "somewhat weaker economic recovery and a slower increase in inflation rates compared with earlier expectations" coupled with "downside risks have emerged" but it was premature to "conclude on whether these developments could have a lasting impact on the outlook for prices and on the achievement of a sustainable path of inflation towards our medium-term aim, or whether they should be considered to be mainly transitory."

The September 2015 ECB staff macroeconomic projections for the Euro Area, forecast annual real GDP increasing by 1.4% in 2015 from 1.5% forecasted in June; 1.7% in 2016 from 1.9% and 1.8% in 2017 from 2%. "Compared with the June 2015 Eurosystem staff macroeconomic projections, the outlook for real GDP growth has been revised down, primarily due to lower external demand owing to weaker growth in emerging markets," Draghi said. Inflation will average 0.1% in 2015, 1.1% in 2016 and 1.7% in 2017.

At the press conference in an answer to a question on ramping-up QE, Draghi responded: "We aren't there yet."

Another journalist asked: "Mr Draghi, it seems that triggering an economic stimulus by measures of monetary policy becomes more and more difficult: why is this so? Is it only because of the situation in the emerging market countries?"

Draghi: "Well, I would say that our accommodative monetary policy is being passed through to the rest of the economy. I went through the various indicators of the monetary conditions: not only robust growth in M1, significant growth in M3, but also credit flows are now picking up. And the interesting thing is that credit is also improving considerably in some of the stressed countries, like Spain and Italy, but certainly in France as well. Its cost has gone down. More particularly what we have is a composed lending indicator cost: it went down by 74 basis points since the announcement of the credit easing measures. So we have a reduction in dispersion of credit flows, and also a reduction in spreads in lending costs and a reduction in spreads in lending costs to SMEs vis-à-vis other kinds of companies, large companies. So we have evidence that our monetary policy works. At the same time, we have the rest of the world, and we have these effects that we've observed over the last few weeks — perhaps more than a few weeks; especially in the last few weeks — so we'll have to see whether these effects are transitory or are permanent. Whether what happened is worsening our medium-term outlook or is just a transitory effect. And then we'll decide whether to do more or not."

The pan-European Stoxx Europe 600 index closed more than 2.3% higher on Thursday but it lost 2.5% on Friday after a mixed US jobs report. After its worst month since 2011 in August, amid a China-fueled global rout, the European measure dipped for the third week in four, closing down 2.8% and is up 3.09% in 2015.

The FT reported that Jörg Krämer, chief economist at Commerzbank, said that minutes after Draghi began speaking Germany’s main share index, the Dax, had shot upwards. It closed down on Friday.

“The ECB is creating asset price inflation and contributing to volatility,” said Krämer. “It’s a problem when central banks react too much to markets. When there are setbacks and they can no longer ease policy, they disappoint.”

The ECB reduced its benchmark interest rate to 0.05% on 10 Sept 2014.

ECB data in Sept show that the composite cost-of-borrowing indicator for new loans to corporations in the 19 Euro Area countries fell by 7 basis points (0.07%) from the previous month to 2.19% in July 2015. The composite cost-of-borrowing indicator for new loans to households for house purchase increased by 4 basis points from the previous month to 2.22% in July. Ireland's average rate for house purchases was 3.43%.

  Period 
Germany, Lending for house purchase excluding revolving loans and overdrafts, convenience and extended credit card debt [A22-A2Z], Households and non-profit institutions serving households (S.14 and S.15) [2] Year-to-Year %-change Germany, Loans (defined for cost of borrowing purposes, sum of A2A and A2Z (both related to non-financial corporations)), Non-Financial corporations (S.11) [2] Year-to-Year %-change Spain, Lending for house purchase excluding revolving loans and overdrafts, convenience and extended credit card debt [A22-A2Z], Households and non-profit institutions serving households (S.14 and S.15) [3] Year-to-Year %-change Spain, Loans (defined for cost of borrowing purposes, sum of A2A and A2Z (both related to non-financial corporations)), Non-Financial corporations (S.11) [3] Year-to-Year %-change Ireland, Lending for house purchase excluding revolving loans and overdrafts, convenience and extended credit card debt [A22-A2Z], Households and non-profit institutions serving households (S.14 and S.15) [4] Year-to-Year %-change Ireland, Loans (defined for cost of borrowing purposes, sum of A2A and A2Z (both related to non-financial corporations)), Non-Financial corporations (S.11) [4] Year-to-Year %-change Italy, Lending for house purchase excluding revolving loans and overdrafts, convenience and extended credit card debt [A22-A2Z], Households and non-profit institutions serving households (S.14 and S.15) [5] Year-to-Year %-change Italy, Loans (defined for cost of borrowing purposes, sum of A2A and A2Z (both related to non-financial corporations)), Non-Financial corporations (S.11) [5] Year-to-Year %-change
  (Euro )   (Euro )   (Euro )   (Euro )   (Euro )   (Euro )   (Euro )   (Euro )  
2015-07 2.00 -18.70 2.05 -15.98 2.12 -26.64 2.51 -27.25 3.43 -0.87 2.90 -20.11 2.48 -22.98 2.61 -27.90

There have been declines in the cost of lending in both Italy and Spain of up to 27% in the 12 months to July, but the cost of lending for house purchase in Ireland has been almost stagnant at 3.43%. In June 2015 it was 2.7% above the level in June 2014. The average rate for Italian loans to non-financial firms, not visible in the table above, was 2.61%, down 27.90% in 12 months.

The average rate for new business for non-financial corporations in Ireland is also above the levels in Italy and Spain. Some rates in Italy were about double rates in Germany until recent times.

SEE: Living in unique economic/ financial times; Interest rates at 5000 year low

ECB interest rates Irish

Pic above: A sculpture by Giuseppe Penone, one of the leading representatives of the “Arte Povera” movement, was installed outside the primary entrance of the main building of the ECB in Frankfurt am Main, on 4 September 2015. Called “Gravity and Growth”, it measures 17.5 metres in height and is actually a tree made of bronze and granite with a cluster of gilded leaves — similar to the sculpture outside the Central Bank of Ireland building on Dublin's Dame Street.

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