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European Central Bank to start printing money next week

By Reuters - Mar 05,2015 - Last updated at Mar 05,2015

NICOSIA/FRANKFURT — The European Central Bank (ECB) will launch into quantitative easing (QE) next week having increased its economic growth forecasts for this year and next.

President Mario Draghi said the first bond purchases with new money would take place on March 9.

The eurozone's central bank has said it will buy 60 billion euros a month until September 2016 or until inflation is pushed back towards a target of close to but below 2 per cent.

The ECB, which left interest rates on hold at record lows just above zero at its meeting off-base in Cyprus on Thursday, lifted its growth forecast to 1.5 per cent for this year, from the 1 per cent it predicted in December.

For 2016, growth of 1.9 per cent is now expected, up from a previous 1.5 per cent.

"The latest economic data, and particularly survey evidence available up to February, point to some further improvements in economic activity at the beginning of this year," Draghi told a news conference.

"Looking ahead, we expect the economic recovery to broaden and strengthen gradually," he said.

An analysis of Reuters polls shows more than half the most important economic data reports from the eurozone since the start of the year have beaten the consensus forecast and many have topped the highest prediction.

Germany, Europe's largest economy, has led the way.

Inflation, now running at 0.3 per cent, is forecast at zero  this year rising to 1.8 per cent in 2017. That is sufficiently close to the ECB's target to suggest money printing will not run beyond September 2016.

The bank has a long way to go to convince markets its plans will be effective. Only half of the economists polled by Reuters think bond buying will help inflation rise towards the target of close to but below two per cent and half think the purchases will be extended.

There are tentative signs inflation has bottomed out.

The February reading of 0.3 per cent was above forecasts, oil prices have rebounded from January lows, growth is picking up and the euro hit a fresh 11-year low against the dollar overnight, boosting prospects for higher imported inflation.

"The risks surrounding the economic outlook for the euro area remain on the downside but have diminished following recent monetary policy decisions and the fall in oil prices," Draghi said.

Anticipation of the QE programme has driven eurozone borrowing costs down to the point where Spain can borrow for 10 years at under 1.3 per cent and investors actually pay for the privilege of lending to Germany for five years. Yields in Italy, Spain and Portugal dropped to record lows this week.

Some analysts have suggested the ECB would distort the bond market by buying bonds with negative yields. Draghi said it would only steer clear of bonds yielding less than the ECB's 0.2 per cent deposit rate.

Another concern is whether the ECB will find enough bonds to buy as the market is flush with uninvested cash while banks are under obligation to hold top tier assets, like government debt.

"There may be complexities. We think they are not relevant," Draghi said, noting that more than half eurozone sovereign bonds were held outside the currency area.

Draghi added that the ball was now in the court of eurozone governments who must contribute "decisively" to economic recovery with structural economic reforms.

"Decisive implementation of product and labour market reforms and actions to improve the business environment for firms need to gain momentum in several countries," he indicated. "It is crucial that structural reforms be implemented swiftly, credibly and effectively."

Draghi said the ECB will resume normal lending to Greek banks only when it sees Athens is complying with its bailout programme and is on track to receive a favourable review.

He also made clear the eurozone bank would not raise a limit on Athens' issuance of short-term debt to help leftist Prime Minister Alexis Tsipras avert a funding crunch, since the European Union treaty barred monetary financing of governments.

The tough line, spelled out after the ECB's policymaking Governing Council met in Cyprus, added to pressure on Greece's radical new rulers to implement promised reforms under a bailout they had vowed to scrap but were forced to extend for four months to avoid running out of money.

"The ECB is a rule-based institution. It is not a political institution," Draghi told a news conference in Nicosia.

"The ECB is the first to wish to re-start the financing to the Greek economy provided the conditions are in place, and the conditions are that a process which suggests a successful completion of the review be put in place quickly. That is the condition and we will certainly welcome such a development," he said.

The required measures include pension reform, privatisations and a streamlining of value added tax to which Tsipras' hard left Syriza Party is bitterly opposed.

The troubled sell-off of state assets suffered another blow on Thursday when Greece's top administrative court blocked the sale of a luxury seaside resort outside Athens to an Arab-Turkish fund, court officials said.

The judges ruled the sale of the prime Astir Palace hotel complex and the development of the site breached planning rules and would harm the natural, cultural and urban environment.

Greek unemployment rose slightly to 26 per cent in December, while jobless totals are falling in other eurozone countries that have been through bailout programmes such as Ireland, Spain and Portugal.

Draghi said the central bank had doubled lending to Greece to 100 billion euros in the last two months, equivalent to 68 per cent of the heavily indebted country's economic output, but could not buy Greek bonds under its new asset-buying programme.

 

Lifeline raised

 

The ECB increased the ceiling on emergency lending assistance for Greek banks, introduced last month when it stopped accepting Greek government bonds as collateral for funds, by 500 million euros to nearly 69 billion euros.

Draghi said the ECB could only go on authorising this liquidity line as long as the banks were solvent with adequate capital, which remained the case despite massive capital outflows in the last two months due to political uncertainty.

The ECB had asked eurozone members keep a 10 billion euro recapitalisation fund on standby "to face any sudden negative contingency that might materialise now", he added.

Finance Minister Yanis Varoufakis reached a deal with the eurozone, the ECB and the International Monetary Fund (IMF) last week on a four-month extension of a 240 billion euro financial rescue which had been due to expire at the end of February.

However, the creditors have blocked avenues suggested by Athens for temporary state funding in a drive to ensure Greece complies with the deal before any more aid is released.

With tax revenues falling, Varoufakis is trying to scrape together cash from government reserves and state pension and health funds to meet a crucial repayment to the IMF this month.

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