Mario Draghi has seven weeks to build consensus among policy makers on a stimulus package following a fractious end to 2014.
After refraining from quantitative easing for the euro area in yesterday’s Governing Council meeting, the European Central Bank president has pledged to “reassess” the situation early next year. The council expects to consider a proposal for broad-based asset purchases including sovereign debt at the next monetary-policy meeting on Jan. 22, said two euro-area central-bank officials familiar with the deliberations.
With inflation already at a five-year low and the rate now being further undermined by a slump in oil prices, pressure will remain on policy makers to consider expanding stimulus. Draghi said that while he believes broad agreement on any action can be reached, he doesn’t need unanimous support.
“The scene is clearly set for QE,” said Carsten Brzeski, chief economist at ING-DiBa AG in Frankfurt. “The continued emphasizing of low inflation will make it very hard for even the purest Germanic monetarists to eventually block QE.”
Draghi strengthened his language on possible stimulus by saying that policy makers “intend” rather then “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 1 trillion euros ($1.24 trillion) in assets, at least three policy makers opposed the revised balance-sheet language, according to euro-area officials familiar with the discussion. Board members Yves Mersch and Sabine Lautenschlaeger were among the dissenters, said the people, who asked not to be identified because the discussion was private.
The package for January, which hasn’t yet been designed, is envisaged as including various types of bonds while excluding equities, the euro-area central-bank 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 program may be influenced by incoming data, they said. An ECB spokesman declined to comment.
Goldman Sachs Group Inc. Chief European Economist Huw Pill told reporters in London today that he wouldn’t “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 companies and consumers.
“There is an intellectual framework which leads you in that direction,” said Pill.
Some ECB officials favor a government-bond purchase program exceeding 1 trillion euros, German newspaper FAZ reported today, citing a person familiar with the matter. ECB simulations show such a plan could increase the inflation rate by as much as 0.8 percentage point, the report said.
If policy makers don’t decide to implement any program in January, the next opportunity to consider the matter may be at their March 5 meeting when they present new economic forecasts.
The ECB doesn’t have a set of specific criteria that could trigger a decision for broad-based asset purchases, Governing Council member Ewald Nowotny told reporters in Vienna today.
On deciding whether to implement QE, “it’ll be important how the economy develops, how Europe’s export markets will develop” and what effect the weakening of the euro will have, he said.
Some of the most-prominent opposition to sovereign-bond purchases has come from the euro area’s largest economy -- Germany. Executive Board member Lautenschlaeger and Governing Council member Jens Weidmann have both 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 still have to put off action once again in January, according to Nicholas Spiro, managing director of Spiro Sovereign Strategy in London.
“While Draghi may well claim that Germany does not have a veto on QE, the fact remains that it’s German opposition to more aggressive stimulus that’s preventing the ECB from taking bolder action,” he said. “The ECB is now 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.
Inflation slowed to 0.3 percent in November and the ECB downgraded its forecasts through 2016. It said consumer-price growth will average 0.5 percent this year and climb to just 1.3 percent in 2016. The ECB defines its price-stability goal as keeping inflation just under 2 percent.
The Bundesbank today also cut its economic predictions. It now sees German inflation of 1.1 percent next year, down from a June prediction of 1.5 percent, and gross domestic production increasing 1 percent, half its previous forecast.
Moreover, both the ECB and the German predictions were formulated before a slump in oil prices when the Organization of Petroleum Exporting Countries decided not to ease a global glut of crude.
“Over the coming months, annual inflation rates could experience renewed downward movements, given the recent further decline in oil prices,” Draghi said. “We will be particularly vigilant as regards the broader impact of recent oil-price developments on medium-term inflation trends.”
Still to come before the next monetary-policy meeting, the European Court of Justice will deliver a non-binding ruling on Jan. 14 about the legality of OMT. The ECB’s still-untapped bond-buying program was credited with stopping a rout in European government debt in 2012. A negative judgment by the court could ultimately 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 Dec. 11. The first round in September came in below analysts’ estimates and a bigger take-up next week could ease the pressure on the ECB.
Another disappointing round may provide the justification to act.
“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, senior European economist at Royal Bank of Scotland Group Plc in London. “Draghi is playing hardball, where he hopes that doing nothing today increases the chance of doing enough tomorrow.”