ECB leaves interest rates unchanged

Billy Ehrenberg
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The European Central Bank has left interest rates untouched at 0.05 per cent, but today has bigger fish to fry (Source: Getty)

The European Central Bank (ECB) has left its headline interest rate untouched at 0.05 per cent where it has been since early last month.

The inaction was widely expected but today Mario Draghi has other big fish to fry.

The bank's president is set to clarify the ECB's intentions for the asset-backed security purchasing programme (ABSPP) and the third covered bonds purchase programme (CBPP3).

By buying securities directly from the banks, the ECB will be hoping to encourage more lending, hopefully dragging the 0.3 per cent inflation the Eurozone is currently experiencing out of the sub-one-per-cent danger zone.

Deflation is seen by analysts to be a product of multiple pressures including low commodity prices, sluggish wage growth, and overcapacity (low demand means companies can't sell everything they produce).

The ECB is understood to want to expand its balance sheet to €3 trillion, which would mean an almost 50 per cent increase. Currently the bank has around €700bn in ABS on its balance sheet.

Before today, the ECB had considered only investment grade ABS and an expansion to sub-investment grade would mean Greek and Cypriot securities would fall within the scope.

Peter Garnry of Saxo Capital Markets saw today's announcement as an opportunity for the ECB to revive the market:

If the ECB goes all in on the ABSPP it will likely be a major positive catalyst for European banks as the ABSPP will suddenly create a liquid market for ABS and thus allow banks to transfer risk off their balance sheet and free up capacity for new lending.

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