ECB targets new asset-buying plan to boost economy, battle deflation

(Reuters) – The European Central Bank will present details on Thursday of a new asset-buying plan with which it hopes to revive the flagging euro zone economy and see off the specter of deflation.

The ECB plans to buy asset-backed securities (ABS) – packages of reparcelled loans – with a view to spurring the market for such credit and supporting lending to the small- and mid-sized firms that form the backbone of the euro zone economy.

But for the plan to apply across the bloc, the central bank may need to buy ABS paper below the standard it usually requires for collateral offered up by those tapping its funding operations.

That prospect has already stirred controversy in Germany and elsewhere. But the weak economic outlook has convinced a majority of the ECB’s 24 Governing Council members they need to act.

Last month, the ECB said it would buy ABS and covered bonds to push money into the economy. The bank also cut interest rates to record lows and said they were at their lower bound.

No rate moves are expected on Thursday, but ECB President Mario Draghi will flesh out the asset-buying plan.

“I expect them to announce a pretty comprehensive purchase program (for ABS and covered bonds) for the next two years, and a big number – between 200 and 300 billion euros,” said Berenberg Bank economist Christian Schulz.

A Reuters poll on Monday showed money market traders on average expect the ECB to buy a total of 200 billion euros of ABS and covered bonds over a year.

The euro zone’s problems have been on display in data this week: manufacturing growth slowed further in September, and inflation has slipped to just 0.3 percent – far lower than the ECB’s medium-term target of close to but below 2 percent.

ABS CONTROVERSY

After disappointing initial take-up of a new round of cheap ECB loans to banks, Frankfurt’s efforts to restart the ABS market have come into sharper focus.