Mario Draghi Resists Criticisms, Plans Sovereign Bond Purchases

The European Central Bank may begin a U.S. style quantitative easing program as early as January 2015.

In a press conference, ECB President Mario Draghi said that a bond-buying program would help stimulate growth in the European Union while also keeping the Eurozone from a deflationary trap. “I am convinced that a quantitative easing program, which could include sovereign bonds, falls within our mandate,” he said, adding that price stability remains the ECB’s “main objective.”

The European Central Bank may begin a U.S. style quantitative easing program as early as January 2015.

In a press conference, ECB President Mario Draghi said that a bond-buying program would help stimulate growth in the European Union while also keeping the Eurozone from a deflationary trap. “I am convinced that a quantitative easing program, which could include sovereign bonds, falls within our mandate,” he said, adding that price stability remains the ECB’s “main objective.”

The ECB also downgraded its growth expectation, emphasizing that weak global demand is hurting European exports in a trend that is unlikely to change in the near term. “World growth demand is softer, so that’s why our projections for exports have gone down,” Draghi said.

ECB to Buy Bonds in 2015

Mario Draghi did not give a timetable or purchase target for a quantitative easing program that would include buying European sovereign bonds, but the euro-area bank is in the early stages of planning a program, according to unnamed sources quoted by Bloomberg News.

The move towards a QE program is widely expected, as Mario Draghi tells reporters that policymakers “won’t tolerate” prolonged low inflation. The ECB is considering purchasing a variety of assets, including equities. However, Draghi said the ECB was not considering buying gold in its program.

Legal Challenge to Draghi

Meanwhile, the European Court of Justice is assessing the legality of a bond-buying program. The ECJ is planning a ruling on the program by January 14th, a week before the ECB’s next meeting on monetary policy, scheduled for January 22nd. While the decision will not be binding, a negative decision could make it harder for the ECB to initiate a QE program.

In a press conference, Draghi dismissed the risks of a negative judgment from the ECJ. “Would we discuss things that are illegal? Wouldn’t we have a better use for our time?” Draghi asked sarcastically when asked about the legality of a bond-buying program.

“We have to comply with our mandate. We’re not politicians here. I am convinced that a quantitative easing program, which could include sovereign bonds, falls within our mandate.”

Market Response Mixed, Borrowing Costs Fall

U.S. stocks fell and quickly recovered on the news, even as European stocks fell steeply. The Euro Stoxx 50 fell 1.74% on Thursday, while German government bond yields rose slightly. The Germany 10 year Bund rose two basis points, while the U.S. 10-year Treasury lost seven basis points to 2.26%.

A decline in bonds is keeping borrowing costs lower, which some analysts believe will cause the American real estate market to heat up in 2015. Mortgage rates fell to 3.89%, according to Freddie Mac, their lowest level since May 2013.

The falling rates may encourage more mortgage refinancing activity, after mortgage activity has fallen for the year. According to the Mortgage Bankers’ Association, refinancing in 2014 has reached the lowest level since 2000.

Although U.S. regulators have loosened lending standards for banks, many Americans have found it difficult to secure a mortgage, while closing costs remain high. “We know that access to credit remains tight for many borrowers, and we are also working to address this issue in a responsible and thoughtful manner,” said Melvin L. Watt, director of the Federal Housing Finance Agency.

In Europe, mortgage rates have also fallen, with many 15-year loans offering rates below 2.6%.