Mario Draghi’s reassurance that the European Central Bank is prepared to step up its efforts surrounding monetary policy in the eurozone suggests QE could be introduced “around the turn of the year”, says Capital Economics senior European economist Jennifer McKeown.
Speaking at Jackson Hole on Friday last week Draghi argued that monetary policy “can and should play a central role” in boosting demand in the eurozone and said the ECB was “ready to adjust [its] policy stance further.”
These latest comments from Draghi fall in line with Capital Economics “long-held view” the the ECB will introduce QE, according to McKeown, while similar expectations have also been building in the market for some time now following Draghi’s previous statement that this type of asset purchase programme falls “squarely within the the ECB’s mandate.”
McKeown highlights a particular comment from Draghi surrounding the recent drop in long-term financial market inflation expectations which could indicate that the “final barrier” to quantitative easing “has been broken.”
“What really stood out to us was his emphasis and apparent concern over the recent fall in long-term financial market inflation expectations,” she says.
“He has previously stated that a drop in these expectations would be the context for a broad-based asset purchase programme, so it seems that what was the final barrier to quantitative easing (in the Governing Council’s eyes at least) has been broken.”
But McKeown does stress that the introduction of a QE package “does not seem imminent” and instead suggests that the ECB are more likely to take take action to bring in QE “around the turn of the year.”
She says: ”QE does not seem imminent. Mr Draghi still claimed to be confident that the package of measures we announced in June will indeed provide the intended boost to demand, suggesting that the ECB will allow some time to judge the effect of its Targeted Longer-Term Refinancing Operations (TLTROs). The first of these will not take place until 18th September. In the meantime, he may be hoping that economic sentiment recovers somewhat as disruption related to the Ukraine crisis eases”.
McKeown continues: “President Draghi’s comments at Jackson Hole supported our long-held view that the ECB will take the plunge into full-blown quantitative easing, probably around the turn of the year.”
However there are also “serious questions” as to how effective QE will actually be in the eurozone, according to McKeown, when taking into account that bond yields are “already very low” throughout the currency bloc.
She adds: “But even assuming that the ECB buys only government bonds, it might raise the price of riskier assets through so-called “portfolio rebalancing effects”. Actually announcing and implementing QE could also prompt an additional fall in the euro exchange rate and boost business and consumer confidence.
“In short, while its effects are uncertain, the growing risk of the eurozone falling into a deflationary spiral suggests that quantitative easing has to be worth a try.”