ECB QE drifts from if to when, say many analysts

December 4, 2014

RTR3OB5X.jpgSerious deflation risks in the euro zone mean it is no longer a question of if, but when the ECB will purchase sovereign bonds — at least among many of those who are paid to forecast policy.

In a Reuters poll conducted last week, economists had already placed cautious bets on the ECB buying government bonds with the consensus pointing to just even chances, owing mainly to unwavering opposition from Germany.

At a press conference after the bank’s policy meeting on Thursday, ECB President Mario Draghi was careful to skirt a question that aimed to pin down the timing of a QE programme. 

You are in a very intelligent way trying to extract from me the date of next decisions, and you won’t get it. ‘Early’ means ‘early’, it doesn’t mean the next meeting, it depends very much on how our assessment will go.

But there is very little on the horizon to change the outlook for the euro zone economy, which the ECB staff forecasts downgraded again. There is also little that shows an imminent change to German opposition to QE.

Euro zone inflation is less than a quarter of the ECB’s 2 percent target, well into what the bank terms the “danger zone,” and will almost certainly tumble to zero or lower owing to a nearly 40 percent plunge in oil prices.

Growth also is stalling, with the real risk of further contraction early in 2015.

For now, Draghi appears to be more worried about the fall in inflation than a potential consumer spending-driven boost from dramatically cheaper oil. That supports the view that it’s only a matter of time before QE.

After his remarks on Thursday, many said they were convinced that the ECB will be forced to launch a QE programme similar to that of the U.S. Federal Reserve and Bank of England, early next year.

The main difference between the ECB and these other central banks is that the ECB would be many years late, and at a time when bond yields already are at or near record lows.

The most plausible timing, according to most, would be March, given that the ECB only meets twice during the quarter after switching away from monthly Governing Council meetings starting in 2015.

Jan von Gerich and Holger Sandte at Nordea wrote:

Today’s signals from the ECB clearly support our view that uncertainty relates more to the exact timing of further measures than whether such measures need to be taken at all. We continue to expect an announcement of a broad-based asset purchase programme in March, including buying government bonds, but risks are clearly tilted towards action already at the January meeting.

We expect an average inflation rate of zero in the first quarter of next year and pencilled in a negative rate for March. All in all, the projections clearly leave room for more policy action.

Philip Shaw, chief economist at Investec, wrote:

QE might not be the additional first step in March – it could, for example, buy greater quantities of covered bonds and ABS. Also, Mr Draghi alluded to several forms of QE, for example using different assets. Hence initially it is possible that the ECB begins to buy corporate rather sovereign bonds. We note too that the Bank of Japan includes equity ETFs in its QE purchases.

In terms of the policy summary we consider that today’s meeting takes the ECB that much closer to biting the bullet and launching QE. However it could play for more time by initially becoming more aggressive on its existing purchase programmes. Also, in a concession to the German contingent on the Governing Council, it could kick off a QE programme through purchasing corporate bonds before moving onto sovereigns.”

Whether QE would do any good is far from clear. But if the ECB is to achieve its stated goal of getting its balance sheet to 3 trillion euros, up 1 trillion from where it is now, doing so without buying sovereign bonds would be next to impossible.

Ever since his “whatever it takes” speech several years ago, it has been Draghi’s words more than his actions that have moved markets. But many are now starting to worry how long the magic will last.

Marc Ostwald, economist at ADM Investor Services, wrote:

The  January 22 meeting is likely to deliver nothing new, the March meeting could, but is no ‘done deal’, and in the intermediate period, the question remains how long “hope of ECB QE” can sustain 10-yr Bund yields at 0.77%, French at 1.03, Spain at 1.87% and Italy 2.01% – especially if there is say a snap general election in Greece. The skew in risk terms looks increasingly pernicious. The assessment is thus that ECB hopes have not been dashed, but they certainly have been deferred, and that the risks of disappointment are also rising.

 

Greg Fuzesi, European economist at JP Morgan, says the “ECB needs more time to think.”

During the Q&A, Draghi did not give the impression that he particularly had the January meeting in mind. This means that given the new six-weekly meeting schedule next year, new policy announcements may have to wait until the meeting in early March (when new staff forecasts will be available, including projections for 2017). This suggests less urgency than Draghi has signalled two weeks ago and gives more time for growth improvements to complicate the debate by the spring.

 

— Additional reporting by Sumanta Dey

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