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Will the ECB add to its QE this week?

Citi sees more QE at ECB’s December meeting

Reuters
European Central Bank President Mario Draghi faces a hard task of bringing inflation back to target.

The European Central Bank’s aggressive quantitative-easing program hasn’t even been around to mark its first birthday, and already pressure is mounting on the policy makers to announce more stimulus.

With the closely watched ECB meeting coming up this week, investors are now speculating about when the central bank will make a further stimulus move, rather than if such a move could happen. That notion was hammered home last week, when data confirmed the eurozone has slipped back into negative inflation, which is bad news for both the ECB and the region’s growth prospects.

The central bank’s primary mandate is to ensure price stability throughout the currency bloc and that means targeting inflation rate of close to, but below 2%. We haven’t been there since January 2013. Inflation presently stands at negative 0.1%.

“Renewed eurozone deflation in September heaps pressure on the ECB to step up its stimulative action at its 22 October policy meeting,” said Howard Archer, chief U.K. and European economist at IHS Global Insight, in a note.

“Further ECB action would be most likely to be through increasing and/or extending of its quantitative-easing program. [ECB President] Mario Draghi has repeatedly stated that interest rates have reached their lower bound,” he added.

The 60-billion-euro ($68.13 billion) a month QE program launched in March is currently slated to run through September 2016. But Draghi has stressed the bank is ready “to act” to fend off the threat of low inflation.

Wait-and-see mode

However, Archer — and most other analysts — don’t expect the ECB to go further down the easing path just yet. Several central-bank officials have stated that it is too early to fully judge whether more easing is needed or if the already-announced €1.1 trillion bond-buying program is doing the trick.

ECB council member Ewald Nowotny said Monday a possible QE expansion is something “we’ll discuss when there’s a need,” while Bank of France Gov. Christian Noyer said the current bond-buying program is “well calibrated”.

Executive board member Yves Mersch noted last week that “amid the renewed decline in headline inflation, we have to be mindful whether there could be second-round effects stemming from the decline in oil prices, or if there is an overestimation in the assessment of the Chinese situation.”

Low oil prices CLX5, +0.24% which have declined more than 50% since their highs in the summer of 2014, are seen as the main culprit behind undesirably low inflation levels in most part of the developed world. In the U.K., annual inflation has also turned negative, while consumer price-growth has been flat in the U.S.

Negative inflation, or outright deflation, makes debt harder to pay off for households and governments, deters some consumer purchases and has as in the case of Japan spurred high unemployment and slowed economic growth.

“Although the ECB is currently missing its mandate by a large margin, there is little pressure to deliver more QE immediately,” economists at Citigroup said in a note.

“However, we expect that the recent tightening in financial conditions will likely prompt the [Governing Council] to review a number of policy options at its disposal, to be ready to act when necessary. Another round of monetary policy loosening is our baseline for the last meeting of 2015 on Dec 3.,” they said.

QE success in doubt

Whether another stimulus package would actually boost growth and inflation in the eurozone has been hotly debated. QE programs are usually expected to boost asset prices, weaken the exchange rate and provide an overall lift to the economy.

But as MarketWatch columnist Matthew Lynn points out, we’ve seen very little of that this year in Europe. The euro EURUSD, +0.3178% is at $1.1348 far above what analysts were forecasting six months ago. The economy remains sluggish. And the region’s main equity benchmarks are scrambling to remain in positive territory for the year.

On the back of that, David Bloom, HSBC’s global head of foreign-exchange research, said he expects the ECB to launch some type of easing measures over the coming months, but questioned whether it would have any real effect.

“They don’t have a big bazooka anymore. That’s gone. They’ve used it. It was a one-shot wonder,” he said.

The ECB announces its rate decision on Thursday, Oct. 22 at 12:45 p.m. London time, or 7:45 a.m. Eastern Time, followed by Draghi’s news conference at 1:30 p.m. If any fresh easing measures are implemented, they will be revealed during the news conference.

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