Draghi’s QE Battle Almost Won as Economists See Action
The battle over whether to start quantitative easing in the euro region is all but won, economists say.
More than 90 percent of respondents in Bloomberg’s monthly survey predict theEuropean Central Bank will begin large-scale buying of government bonds next year, up from 57 percent last month. An announcement will most likely come in the first quarter, with any decision taken against the objections of some policy makers, the poll of 55 economists showed.
With less than six weeks to go before the ECB’s next monetary-policy meeting, President Mario Draghi’s drive to corner dissent on more stimulus is taking on added urgency. Plunging oil prices threaten to tip the 18-nation economy into deflation, and banks are showing little appetite to use cheap central-bank cash to boost lending.
“There is no doubt that the ECB will scale up its expansionary policies -- it’s just a matter of timing,” said Duncan de Vries, an economist at NICB Bank NV in The Hague. “The ECB will remain under huge pressure to protect its credibility and fulfill its price-stability mandate.”
Inflation slowed to 0.3 percent last month, matching the weakest level in five years. ECB Chief Economist Peter Praet said last week that the rate could turn negative in coming months, and Draghi hinted that the recent slump in oil prices will reduce the institution’s 2015 forecast of 0.7 percent by more than half.
The ECB president’s strategy for steering euro-area inflation back to his goal of just under 2 percent is to add as much as 1 trillion euros ($1.24 trillion) to the ECB’s balance sheet via targeted long-term loans to banks and asset purchases. Three quarters of economists said he’ll succeed, up from 60 percent in the November survey.
Current measures will add about 700 billion euros by the end of 2016, according to the median estimate in the survey. That’s partly offset by crisis-era loans that must be repaid by February, leaving the ECB in search of more than 500 billion euros through measures yet to be announced.
More than three quarters of the respondents said those measures will include buying corporate bonds, and 55 percent predict the ECB will purchase agency debt. Draghi said on Dec. 4 that “all assets but gold” are under consideration.
He may have to ruffle some feathers. Ninety-six percent of the economists said some policy makers will oppose fresh stimulus.
The most vocal resistance has come from German officials. Executive Board member Sabine Lautenschlaeger and Bundesbank President Jens Weidmann have both spoken out against sovereign-bond purchases, saying they undermine the incentive for governments to make structural adjustments.
Weidmann stepped up his campaign in newspaper interviews this weekend. He told Le Figaro and La Repubblica that the euro area hasn’t reached a situation where the advantages of a QE program outweigh its costs, and that the drop in oil prices will act as a stimulus.
Germany’s Christian Social Union, the Bavarian sister party of Chancellor Angela Merkel’sChristian Democratic Union, said in a party convention resolution adopted Dec. 12 that the ECB mustn’t become Europe’s “bad bank.” Elsewhere, Estonia’s Ardo Hansson said last week he’s skeptical about QE’s effectiveness.
“The process is unlikely to be smooth,” said Alan McQuaid, chief economist at Merrion Capital Group Ltd. in Dublin. “Germany will vehemently oppose the move and there is no guarantee that banks will sell the bonds to the ECB without an attractive incentive.”
Howard Archer, chief European economist at IHS Global Insight in London, said “one thing the ECB is clearly hoping for” in its pursuit of more stimulus through quantitative easing is a further weakening of the euro. The single currency has lost almost 10 percent against the dollar so far this year.
A second round of targeted long-term loans to banks by the ECB last week came in at the low end of analysts’ forecasts, in a sign that financial institutions see few ways of using cheap central-bank money in the weak economy. Their reluctance may be increased by the ECB’s negative deposit rate, meaning they’re charged for their surplus cash.
The existing programs to buy private assets, which have barely started, are likely to slow over the holiday period. Covered-bond purchases totaled 20.9 billion euros as of Dec. 5, and ABS purchases reached 601 million euros. Fresh figures will be published at 3:45 p.m. in Frankfurt today.
Among economists who specified the month for a QE announcement, 57 percent said it’ll come at the Jan. 22 policy meeting, though implementation may only start later.
“Draghi’s most important task is to make this announcement credible,” Kristian Toedtmann, an economist at DekaBank in Frankfurt. “He has to prove that the ECB is willing to make use of really strong instruments.”