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ECB to act on QE stimulus by March

Thursday, August 28 15:58:17

The European Central Bank will probably launch a quantitative easing program by March and buy asset-backed securities in a bid to prevent deflation and jumpstart economic growth in the region, a Reuters poll found today.

Speculation that the ECB is preparing a program of asset purchases has soared after its president, Mario Draghi, last week said the bank was prepared to respond with all its available tools if inflation were to drop further.

Draghi also emphasized the importance of fiscal stimulus saying it would be "helpful for the overall stance of policy" if fiscal policy could play a greater role alongside its own monetary policy.

That was widely seen as an about-turn in its stance on imposing fiscal austerity on bailed-out nations like Greece, Ireland, Portugal, as well as a tacit hint at further stimulus.

In a snap poll conducted Aug 27-28, economists placed a 75 percent chance the ECB would buy asset backed securities through a quantitative easing (QE) program. Only five of 39 respondents gave a probability of less than 50 percent.

Just two weeks back, a Reuters poll showed only a one-in-three chance of any kind of QE by the end of 2015.

"The ECB has no option but to do something extraordinary, and what's left is quantitative easing," said Petter Lundvik, economist at Handelsbanken, who gave an 80 percent probability of QE.

"It will probably try to boost new issuances in the ABS market by guaranteeing to buy the securities at a future date... but it has to do something."

The size of the asset-backed securities market in the euro zone is about 100 billion euros, according to the ECB, and it would need to be expanded to improve the supply of securities before the central bank can buy into it.

The other financial asset available for outright purchase is sovereign debt, something the U.S. Federal Reserve and the Bank of England have bought as part of their stimulus programs to lower yields and the cost of money in the economy.

For the ECB, though, buying sovereign bonds is legally complicated due to the absence of a common bond and restrictions preventing it from financing any particular government.

Economists in the poll placed a 40 percent chance of the ECB conducting QE through the purchase of sovereign bonds.

The other difficulty for the ECB, which would like to get the euro to fall even further to stimulate exports and perhaps bring in some inflation through imports, is that the central bank is rather late contemplating QE.

While the BoE has long shut its money printing press, the Fed is on track to end its stimulus by October.

Strong economic recoveries in both those economies will likely prompt their central banks to start raising interest rates early next year, with the BoE tipped by economists in a Reuters poll as the likely first-mover.

The poll also showed economists' conviction about their views on when the Fed will raise rates - the consensus is for Q2 2015 - hadn't changed after Fed Chair Janet Yellen's Jackson Hole speech last week.

ECB sources told Reuters on Wednesday that the central bank is unlikely to take new policy action next week unless August inflation figures, due on Friday, show the euro zone sinking towards deflation. (Reuters)