MARIO Draghi, the president of European Central Bank (ECB), has seven weeks to build consensus among policymakers on a stimulus package following a fractious end to 2014.
After refraining from quantitative easing (QE) for the euro area in Thursday’s governing council meeting, Draghi has pledged to “reassess” the situation early next year.
The council expected to consider a proposal for broad-based asset purchases including sovereign debt at the next monetary policy meeting on January 22, said two euro area central bank officials familiar with the deliberations.
With inflation at a five-year low and the rate being further undermined by a slump in oil prices, pressure will remain on policymakers to consider expanding stimulus. Draghi said that while he believed broad agreement on any action could be reached, he did not need unanimous support.
Dissenters
“The scene is clearly set for QE,” said Carsten Brzeski, the chief economist at ING-DiBa. “The continued emphasising of low inflation will make it hard for even the purest Germanic monetarists to block QE.”
Draghi strengthened his language on possible stimulus by saying that policymakers “intend” rather than “expect” the ECB’s balance sheet to grow toward its levels of early 2012. While that change suggests the ECB could be more aggressive in its plan to add as much as e1 trillion (R14 trillion) in assets, at least three policymakers opposed the revised balance sheet language, according to euro area officials familiar with the discussion. Board members Yves Mersch and Sabine Lautenschläger were among dissenters, said the people who asked not to be identified because the discussion was private.
The package for January, which has not been designed, is envisaged as including various types of bonds while excluding equities, the officials said, asking not to be identified because the discussions are private. No decision on implementing QE has been taken yet and the composition of the programme may be influenced by incoming data, they said. An ECB spokesman declined to comment.
Goldman Sachs Group chief european economist Huw Pill said on Friday that he would not “say never” when asked if the ECB could buy bank equities as a way of easing credit further in the region. Banks rather than financial markets typically meet the financing needs of European firms and consumers. “There is an intellectual framework which leads you in that direction.”
Some ECB officials favour a government bond-purchase programme exceeding e1 trillion, Frankfurt General Newspaper reported on Friday, citing a person familiar with the matter. ECB simulations show such a plan could increase the inflation rate by 0.8 percentage point, the report said.
If policymakers do not decide to implement any programme next month, the next opportunity to consider the matter may be at their March 5 meeting when they present new economic forecasts.
The ECB does not have a set of specific criteria that could trigger a decision for broad-based asset purchases, governing council member Ewald Nowotny said.
“It’ll be important how the economy develops, how Europe’s export markets will develop” and what effect the weakening euro will have.
Some of the most prominent opposition to sovereign bond purchases has come from the EU’s largest economy – Germany. Lautenschläger and governing council member Jens Weidmann have openly spoken out against the measure over the past two weeks.
That could mean that while Draghi said “we don’t need unanimity”, to undertake QE, he may have to put off action once again next month, said Nicholas Spiro, the managing director of Spiro Sovereign Strategy.
“While Draghi may claim that Germany does not have a veto on QE, it’s German opposition to more aggressive stimulus that’s preventing the ECB from taking bolder action. The bank is facing a crisis of credibility.” Draghi’s response to his opponents could be to point to worsening inflation numbers and the governing council’s statement that it “remains unanimous in its commitment to using additional unconventional instruments” to meet its mandate of ensuring price stability.
Predictions
Inflation slowed to 0.3 percent last month and the ECB downgraded its forecasts through 2016. It said consumer price growth would average 0.5 percent this year and climb to 1.3 percent in 2016.
The Bundesbank on Friday cut its economic predictions. It sees German inflation of 1.1 percent next year, down from 1.5 percent, and gross domestic product rising 1 percent, half its previous forecast.
The ECB and the German predictions were formulated before a slump in oil prices when Opec decided not to ease a global glut of crude.
“Over the coming months, annual inflation rates could experience renewed downward movements, given the recent decline in oil prices,” Draghi said.”
Still to come, the European Court of Justice will deliver a non-binding ruling on January 14 about the legality of outright monetary transactions.
The ECB’s still-untapped bond-buying programme was credited with stopping a rout in European government debt in 2012. A negative judgment could impinge on the central bank’s freedom to intervene in sovereign debt markets.
An additional indicator to watch is a second round of long-term loans to banks, designed to boost real economy credit, to be allotted on Thursday. A bigger take-up next week could ease the pressure.
“The plan appears to be to wait a little longer in the hope of demonstrating that the current response is not remotely sufficient given the mandate, in order to win sufficient support for a more muscular response,” said Richard Barwell, a senior European economist at Royal Bank of Scotland Group.
“Draghi is playing hardball, where he hopes that doing nothing today increases the chance of doing enough tomorrow.” – Bloomberg