European stocks were buoyed yesterday as European Central Bank (ECB) chief Mario Draghi said the ECB was prepared to buy government bonds.
The ECB has only bought private sector bonds thus far but buying government bonds offers any stimulus programme a much larger scope.
“Other unconventional measures might entail the purchase of a variety of assets, one of which is government bonds,” Draghi told the European Parliament yesterday.
Draghi also told the European Parliament the ECB will continue to do “whatever it takes” within its mandate to save the euro and that the single currency was irreversible.
The comments came after ECB executive board member Yves Mersch said the central bank could theoretically extend purchases to gold, shares, or exchange traded funds or other assets if more action is needed.
The FTSEurofirst 300 index of top European shares closed 0.5 per cent higher at 1,352.01 points.
Andrew Milligan, head of Global Strategy at Standard Life Investments, said ECB action could prompt a change in his “neutral” rating on European equities. “If we feel the ECB is beginning to surprise the markets with more action, then we probably would look at rotating more into European equity,” Milligan said.
Announcement of government bond purchases could come as early at the next ECB decision on 4 December.
Official estimates last week showed growth was still sluggish across the region. Inflation also remains stuck at near-zero levels, registering 0.4 per cent in September – below the ECB’s two per cent target.
Buying government bonds will likely land Draghi in further trouble with Germany who are strongly opposed to any sort of bond purchases.
Germany recently began legal proceedings against the ECB regarding programme launched in 2012 that promised to buy government debt in emergency situations, but was never used. The programme was widely hailed as saving the euro.