BLBG: Draghi Tests Speed Limit as ECB Awaits Stimulus Evidence
After pledging last month to raise inflation in the euro area “as fast as possible,” the European Central Bank president now faces a go-slow from multiple members of the Governing Council. Amid German disquiet over bond-buying and a wait-and-see approach by his own vice president, Draghi is looking for consensus on what further action the ECB can take and when.
The fact that important pieces of the ECB stimulus jigsaw are yet to come, such as a second round of long-term loans to banks, bolsters the case for waiting. Even so, the euro area’s drift closer to deflation means Draghi may need to use his monthly press conference today to reassure investors that officials can respond quickly if needed.
“Having the targeted loans on the horizon gives the more hawkish members of the Governing Council some ammunition to argue we shouldn’t go straight to broad-based asset purchases now,” said Nick Matthews, an economist at Nomura International Plc in London. “There should be some response to the weaker outlook, and the middle-ground solution might be adding corporate bonds to the asset purchases. That keeps the prospect of quantitative easing alive still.”
Unconventional Tools
The ECB will announce official interest rates at 1:45 p.m. in Frankfurt, and Draghi will hold the first press conference from the central bank’s new premises in the city’s east end at 2:30 p.m. Starting next month, the ECB will switch to a six-week cycle of monetary-policy decisions, with the first meeting on Jan. 22.
With interest rates at the lower bound, none of the 54 economists in a Bloomberg News survey expects any change. That puts the spotlight on Draghi, and any comments on unconventional tools. He said after the November meeting that ECB committees have been tasked with the “timely preparation” of further measures that can be used if needed.
The 18-nation euro area is suffering from mediocre economic growth and an unemployment rate of 11.5 percent that weigh on consumer prices. Inflation (ECCPEST) slowed to 0.3 percent last month, matching a five-year low, and further deceleration is likely after a 26 percent slump in the price of crude oil this quarter.
Economic Forecasts
The Governing Council will have fresh staff forecasts to feed into today’s talks. In September, the ECB estimated gross domestic product would rise 0.9 percent this year, 1.6 percent in 2015 and 1.9 percent in 2016. Inflation was forecast to accelerate to 1.1 percent in 2015 from 0.6 percent this year, and again to 1.4 percent in 2016.
“We are particularly interested in the angle that it takes on the sharp fall in oil prices,” said Helen Haworth, a strategist at Credit Suisse Group AG in London. “Being a short-term negative for headline inflation, it could be used as a rationale to expedite QE.”
The ECB’s challenge is that as governments struggle to convince their electorates of the need for economic reforms and haggle over fiscal stimulus, it is left as a lonely defense against further deterioration.
In response, policy makers have committed to swelling the central bank’s balance sheet toward early-2012 levels, or about 3 trillion euros ($3.7 trillion) compared with 2 trillion euros currently. That would increase the amount of money in the economy in a bid to spur growth and inflation.
Programs to buy covered bonds and asset-backed securities started in recent weeks, and the next brick in the balance-sheet defense is a second round of long-term funds linked to banks’ real-economy loans.
Broader Purchases
After a disappointing uptake of 82.6 billion euros in the first round in September, lending on Dec. 11 could be around 170 billion euros, according to the median estimate of economists surveyed by Bloomberg last month. Policy makers could decide to sweeten the deal, for example by reducing the interest rate charged on the loans.
It may not be enough. Without broad-based buying of government bonds, the ECB will only be able to boost its balance sheet to 2.6 trillion euros at most by the end of next year, said Andrew Bosomworth, a money manager at Pacific Investment Management Co. in Munich.
“An asset-purchase program of 500 billion euros, in addition to existing policies, would increase the ECB’s balance sheet back to its early 2012 level,” he said in a note to clients, adding that government bonds should form the largest component of the program. “However, purchases of investment-grade corporate bonds, agency bonds, blue-chip stocks and gold should also be considered.”
QE Pushback
While Draghi was able to announce last month that his council was “unanimous” in its balance-sheet stance, that accord splinters once sovereign debt is brought into the mix.
Sabine Lautenschlaeger, the German member of the six-person Executive Board, last week became one of the most-prominent members of the council to reject that prospect. She said the “purchase of government securities is inevitably linked to a serious incentive problem” by depressing borrowing costs for funding national budgets.
Her comments came after Governing Council member Jens Weidmann said he sees “high legal hurdles” for the buying of government debt.
Even policy makers who view quantitative easing more favorably have signaled the time is not yet ripe. ECB Vice President Vitor Constancio said on Nov. 26 that the measure may be considered in the first quarter of 2015, allowing time to gauge the effect of current stimulus. Executive Board member Benoit Coeure said in a Bloomberg Television interview that officials are “not going to rush” to a decision.
“Draghi would likely ideally want a strong supportive majority,” said Howard Archer, an economist at IHS Global Insight in London. “There is clearly still appreciable reluctance among some ECB’s Governing Council members to engage in full-blown QE.”
To contact the reporters on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net; Stefan Riecher in Frankfurt at sriecher@bloomberg.net
To contact the editors responsible for this story: Fergal O’Brien at fobrien@bloomberg.net Paul Gordon, Zoe Schneeweiss
