All eyes on Draghi amid talk of a €40bn euro zone recovery plan

The European Central Bank’s governing council meets in Frankfurt today amid expectations it may signal plans for an asset-backed securities purchase programme, although most analysts believe any move towards full quantitative easing is some time away.

The monthly rate-setting meeting comes two weeks after ECB chief Mario Draghi surprised analysts by digressing from notes at a speech to the annual gathering of bankers at Jackson Hole in the US, indicating the bank's readiness to "adjust our policy stance further" and "use all available instruments needed to ensure price stability".

He also appeared to imply support for more growth-enhancing measures in the euro zone, a move that has been advocated by France and Italy.

A string of economic figures over the summer have pointed to a slowdown in the euro zone economy, with gross domestic product stalling in the second quarter of the year and contracting by 0.2 per cent in Germany, the area's largest economy.

Downward slide

Inflation has also maintained its downward slide, reaching a five-year low of 0.3 per cent in August. New figures on the services sector yesterday continued the flow of negative news.

With the euro zone’s main interest rate at a record low of 0.15 per cent, and the deposit rate below zero, the ECB has little room for manoeuvre in terms of conventional monetary policy.

The ECB is one of the only central banks not to engage in bond-buying since the onset of the financial crisis, with Britain, the US and Japan all embarking on quantitative easing programmes. However most analysts believe the purchase of sovereign bonds is still some months away and unlikely before the end of the year.

Asset-backed securities

More likely it is an indication by the bank that it plans to purchase asset-backed securities from banks. Mario Draghi said at Jackson Hole that the ECB was “moving fast forward” on a plan to buy asset-backed securities, and had engaged Blackrock to devise a programme.

JP Morgan Chase estimates that the ECB will buy as much as €40 billion of asset-backed securities, focusing on the new-issue market over a three-year period, and buying securities with the highest credit ratings.

The ECB is also due to begin its latest long-term refinancing operation this month in a bid to stimulate lending. The four-year €400 billion programme was announced in June.

The threat of deflation has emerged as a new front for the euro zone economy over the last year. Latest figures show that inflation hit 0.3 per cent last month, its lowest level since 2009, and well below the ECB’s target of keeping inflation “close to but below” 2 per cent.