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ECB to start asset purchases this month in bid to revive lending

The European Central Bank said it will start purchasing private sector assets as soon as this month, in an attempt to revive lending in the eurozone and stave off the risk of deflation.

The ECB governing council opted to leave its benchmark interest rate at 0.05 per cent. The deposit rate charged on a portion of banks' reserves parked at the ECB stayed at 0.2 per cent.

But in a much-awaited press conference in Naples on Thursday, Mario Draghi, president, unveiled details relating to the size and scope of the ECB's plans to buy loans repackaged as asset-backed securities, alongside covered bonds.

The ECB will begin to purchase covered bonds in mid-October and ABS in the final quarter of this year. The programme, which was first announced in September, will last for two years.

Mr Draghi did not provide an exact figure for the size of the purchases but made it clear that there were up to €1tn of covered bonds and ABS which the ECB could buy. He said the central bank aimed to expand its balance sheet back by up to €1tn to levels last seen in early 2012.

Crucially, the ECB said it would consider buying ABS and covered bonds retained by the banks that have created them. The retained ABS make up more than half the European market, and are often used as collateral in exchange for the ECB's cheap loans.

But at the Naples meeting Mr Draghi made it clear that the scheme will only involve "simple and transparent ABS", whose underlying collateral is loans to small and medium-sized enterprises rather than mortgages.

The ECB president confirmed earlier speculation that the central bank will relax its existing rules to purchase Greek and Cypriot loan bundles with "junk" ratings. This move is likely to meet opposition in Germany, where senior policy makers, including Bundesbank president Jens Weidmann, have accused the ECB of taking on too much risk with its ABS purchases.

In an apparent move to appease critics, Mr Draghi said the ECB will limit the size of the purchases of these assets. Greece and Cyprus will have to remain under a EU-mandated programme of structural adjustment to remain eligible for the scheme.

"There must be a programme - if no programme, no purchases," the ECB president said.

Speaking as hundreds of protesters were clashing with riot police in the streets outside the Royal Palace of Capodimonte in Naples, Mr Draghi struck a downbeat note on the outlook for the eurozone economy.

Surveys published this week have shown the currency bloc's recovery to have slowed. Inflation in September fell to 0.3 per cent, a five-year low.

"The recovery is weak, fragile, uneven," Mr Draghi said, adding that the ECB expected inflation to remain low throughout this year before rising "gradually" in 2015 and 2016.

He also said that inflation expectations, as measured by the five-year, five-year inflation swap rate, were still below the ECB's target of below but close to 2 per cent.

Mr Draghi insisted that governments should do more to revive growth, urging politicians to pass structural reforms, including changes to the labour and product market.

While he urged so-called surplus countries, such as Germany, to use their fiscal space to boost demand in the eurozone, the ECB president insisted that all governments should respect the existing budget rules.

"Euro area countries should not unravel progress already made," he said, in a clear reference to recent attempts by France and Italy to push for greater leniency over budget rules.

This week, the government in Paris confirmed its budget deficit will not fall within the EU-mandated limit of 3 per cent of national income. Meanwhile, the Italian government delayed its projection for a balanced budget until 2017.

Europe's main equities indices fell after Mr Draghi's press conference, with Frankfurt's Xetra Dax 30 down 0.8 per cent and the Paris CAC 40 down 1.5 per cent. The euro rose by 0.5 per cent to $1.2686

Additional reporting by Michael Hunter

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