ECB Preparing QE to Be Ready to Counter Deflation: Mersch

European Central Bank Executive Board member Yves Mersch said policy makers are analyzing quantitative easing now to be able to react faster if deflation risks on the 18-nation euro area materialize.

“Between the moment where we decide and the moment where we are operationally ready, we should have a much shorter time lag than would be the case if nothing had been prepared,” Mersch said in response to questions after a speech in London today. “That’s the purpose of the announcement.”

ECB President Mario Draghi last week revealed that policy makers are explicitly discussing the potential deployment of QE to fight the threat of deflation. At the same time, he stressed that he expects inflation to accelerate in April and that he doesn’t predict prices to fall in the 18-nation euro area.

“Inflation risks and deflation risks are more or less level in the euro area, which means we don’t see an imminent risk of deflation,” Mersch said. “However, we are ready to prepare for such a fat tail event” and Draghi’s announcement was meant to show that the ECB has a “Plan B,” he said.

The ECB has run multiple QE models, a person with knowledge of the matter told Bloomberg News on April 4. Earlier that day, Frankfurter Allgemeine Zeitung reported that the institution tested buying about 80 billion euros a month over one year and found that it could boost inflation by as much as 0.8 percentage point or as little as 0.2 percentage point. The newspaper also said officials are leaning toward a credit-enhancing program.

Inflation in the euro area slid to 0.5 percent in March, the slowest pace since November 2009. Draghi said last week, that while the low number was a “genuine surprise,” it was distorted by the timing of the Easter holiday and that he expects the rate to pick up in April. The ECB aims to keep inflation at just below 2 percent.

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