BackDraghi’s QE battle almost won as ECB action predicted
Over 90% of economists in a survey forecast the European Central Bank will begin large scale buying of government bonds next year
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Frankfurt/London: The battle over whether to start quantitative easing in the euro region is all but won, economists say.
More than 90% of respondents in Bloomberg’s monthly survey predict the European Central Bank (ECB) will begin large scale buying of government bonds next year, up from 57% last month. An announcement will most likely come in the first quarter, with any decision taken against the objections of some policymakers, the poll of 55 economists showed.
With less than six weeks to go before the ECB’s next monetary-policy meeting, president Mario Draghi’s drive to corner dissent on more stimulus is taking on added urgency. Plunging oil prices threaten to tip the 18-nation economy into deflation, and banks are showing little appetite to use cheap central-bank cash to boost lending.
“There is no doubt that the ECB will scale up its expansionary policies—it’s just a matter of timing," said Duncan de Vries, an economist at NIBC Bank NV in The Hague. “The ECB will remain under huge pressure to protect its credibility and fulfil its price-stability mandate."
Inflation slowed to 0.3% last month, matching the weakest level in five years. ECB chief economist Peter Praet said last week that the rate could turn negative in coming months, and Draghi hinted that the recent slump in oil prices will reduce the institution’s 2015 forecast of 0.7% by more than half.
The ECB president’s strategy for steering euro-area inflation back to his goal of just under 2% is to add as much as €1 trillion ( ₹ 78 trillion) to the ECB’s balance sheet via targeted long-term loans to banks and asset purchases. Three quarters of economists said he’ll succeed, up from 60% in the November survey.
Current measures will add about €700 billion by the end of 2016, according to the median estimate in the survey. That’s partly offset by crisis-era loans that must be repaid by February, leaving the ECB in search of more than €500 billion through measures yet to be announced.
More than three quarters of the respondents said those measures will include buying corporate bonds, and 55% predict the ECB will purchase agency debt. Draghi said on 4 December that “all assets but gold" are under consideration.
He may have to ruffle some feathers. Ninety-six percent of the economists said some policymakers will oppose fresh stimulus.
The most vocal resistance has come from German officials. Executive board member Sabine Lautenschlaeger and Bundesbank president Jens Weidmann have both spoken out against sovereign-bond purchases, saying they undermine the incentive for governments to make structural adjustments.
Weidmann stepped up his campaign in newspaper interviews this weekend, telling Le Figaro and La Repubblica that the euro area hasn’t reached a situation where the advantages of a quantitative easing (QE) programme outweigh its costs. The Bundesbank said in its monthly bulletin published on Monday that while the drop in oil prices will push even German inflation nearer to zero, it will also act as a boost to households.
Germany’s Christian Social Union, the Bavarian sister party of Chancellor Angela Merkel’s Christian Democratic Union, said in a party convention resolution adopted on 12 December that the ECB mustn’t become Europe’s “bad bank". Elsewhere, Estonia’s Ardo Hansson said last week he’s skeptical about QE’s effectiveness.
“The process is unlikely to be smooth," said Alan McQuaid, chief economist at Merrion Capital Group Ltd in Dublin. “Germany will vehemently oppose the move and there is no guarantee that banks will sell the bonds to the ECB without an attractive incentive."
ECB governing council member Ewald Nowotny, who heads Austria’s central bank, said on Monday that any decision will depend on the outlook for the economy, in particular prices.
The “prospect of missing our target on price stability in the longer term" could trigger QE, he told reporters in Vienna. “There won’t be unconditional approval."
Howard Archer, chief European economist at IHS Global Insight in London, said “one thing the ECB is clearly hoping for" in its pursuit of more stimulus through quantitative easing is a further weakening of the euro. The single currency has lost almost 10% against the dollar so far this year.
A second round of targeted long-term loans to banks by the ECB last week came in at the low end of analysts’ forecasts, in a sign that financial institutions see few ways of using cheap central-bank money in the weak economy. Their reluctance may be increased by the ECB’s negative deposit rate, meaning they’re charged for surplus cash.
The existing programmes to buy private assets, which have barely started, are likely to slow over the holiday period. Covered-bond purchases totalled €24.8 billion as of 12 December, and ABS purchases reached €788 million, according to figures published on the ECB’s website on Monday. Among economists who specified the month for a QE announcement, 57% said it’ll come at the 22 January policy meeting, though implementation may only start later.
“Draghi’s most important task is to make this announcement credible," Kristian Toedtmann, an economist at DekaBank in Frankfurt. “He has to prove that the ECB is willing to make use of really strong instruments." Bloomberg
Rainer Buergin in Berlin and Boris Groendahl and Alexander Weber in Vienna contributed to this story.
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