Mario Draghi is stoking investor speculation that he’ll intensify stimulus for the euro area after indicating he has the backing of policy makers to do so.
With the European Central Bank president downplaying dissent in his Governing Council, preparations for more expansive action and a 1 trillion euro ($1.2 trillion) target for boosting the balance sheet suggest momentum is shifting toward a proposal for broader bond-buying, perhaps in December.
Italian bonds rose today after Draghi said yesterday that policy makers are united in trying to revive inflation and highlighted how they’re stepping up their efforts as the U.S. Federal Reserve pulls back. While economists have suggested corporate-bond purchases could be next, before more controversial sovereign debt, policy makers at a Paris central-bank conference warned that monetary policy alone isn’t enough.
“Draghi signaled that additional monetary easing was in the pipeline,” said Nick Kounis, head of macro and financial markets research at ABN Amro Bank NV in Amsterdam. “Further action could be announced as soon as next month’s meeting.”
Italian government bonds rose for a third day, with the yield on the two-year note dropping two basis points to 0.66 percent at 11:35 a.m. Frankfurt time. Spanish bonds were little changed after gaining yesterday. The euro was up 0.2 percent at $1.2401 after dropping to a more-than two-year low yesterday.
The euro area’s central bankers met in Frankfurt amid claims that Draghi often acts without the backing of them all, and just days after the Bank of Japan ramped up its own stimulus campaign. The question from investors is how much more he can do to boost an economy that risks sliding into its third recession in six years and where inflation is close to becoming deflation.
Having already cut interest rates to record lows and saying they can go no lower, Draghi is now focused on boosting the ECB’s balance sheet. He told reporters that he expects to increase assets back toward March 2012 levels, a clearer commitment than previously. That means a goal of 3 trillion euros, or about 1 trillion euros more than the current level.
The ECB has issued long-term loans to banks and started buying covered bonds in the hope of flooding the economy with enough liquidity to ease credit. Purchases of asset-backed securities are due to start this month.
“We are quite confident that the impact on our balance sheet size will be adequate, will be significant, will be sizable,” Draghi said. “The main message is that our balance sheet will keep expanding in the coming months and will continue expanding while the balance sheets of other central banks is bound to contract.”
Current plans aren’t enough and if the ECB is serious about boosting its balance sheet it will need to snap up corporate bonds, securities from agencies such as the European Investment Bank and ultimately government debt, said Andrew Bosomworth, managing director at Pacific Investment Management Co. in Munich and a former ECB economist.
“From an economic perspective, households and corporations should feel more convinced that the ECB is serious about reflating the euro-zone economy,” he said. “From an investment perspective, investors should also feel more convinced that the euro will depreciate further.”
The Fed last week announced it had stopped its third round of quantitative easing. In contrast, the Bank of Japan increased its program of bond purchases last week, putting pressure on Draghi to follow.
Bank of Japan Governor Haruhiko Kuroda and Fed Chair Janet Yellen are among those speaking at the Paris conference, which includes ECB officials such as Executive Board member Benoit Coeure and Bundesbank President Jens Weidmann.
Participants said too much is expected of monetary authorities and the reliance on them could leave economies permanently weak, echoing Draghi’s call for governments to accelerate structural reforms.
“Central banks have been considered the only game in town,” Bank of France Governor Christian Noyer said. “We all know central bankers do not act in a vacuum.”
The trigger for further ECB action may be its updated economic outlook, which will be unveiled at the December press conference. Draghi said today he sees indications that the forecasts will be cut.
That may still be too soon, according to Mark Wall and Marco Stringa, economists at Deutsche Bank AG in London. Draghi said action would come only if current policies are deemed insufficient to reach the balance-sheet target and the economic outlook worsens.
“A December move cannot be fully discounted, but it is not in line with our understanding of the two contingencies,” the Deutsche Bank economists said, adding they still expect the ECB to buy government bonds in the first quarter of next year.
That would prove controversial given German-led arguments that buying sovereign debt relieves pressure on politicians to shake up their economies, and in the worst case violates a ban on monetary financing of governments.
It would test the limits of Draghi’s ability to push through radical measures. Reuters reported on Nov. 4 that as many as 10 Governing Council members might oppose sovereign-debt purchases even should inflation weaken.
Draghi said he isn’t operating a “kitchen cabinet” and and that no “coalitions” are forming within the 24-member Governing Council. He said his opening statement yesterday was signed by all the members of the decision-making body.
“It’s fairly normal to disagree about things,” he said. “Read recent statements about when to raise interest rates in the U.S. It happens in the U.K., it happens in Japan. This is part of normal diversity.”