Quantitative easing hopefuls may be disappointed as Draghi plays for time

Tue Sep 2, 2014 6:03am EDT
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By Eva Taylor

FRANKFURT (Reuters) - Expectations for further policy action at the European Central Bank's meeting on Thursday are running high after ECB President Mario Draghi pledged to use all available tools to keep prices in check.

But investors may be in for disappointment as resistance to quantitative easing (QE) remains stiff, particularly in Germany, while there is an increasing recognition that the ECB may not be able to solve Europe's problems alone.

Draghi told a central bank conference in Jackson Hole on Aug. 22 that financial market inflation expectations were falling significantly and the ECB would use "all available instruments needed to ensure price stability".

In a dramatic departure from debt-cutting orthodoxy, he also said there was scope for fiscal policy - more government spending - to play a greater role in reviving growth, an apparent acknowledgement of the limits of the ECB's powers.

German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble were reported to have called Draghi seeking clarification and Schaeuble later said he had been "overinterpreted".

Either way, the ECB president's monthly news conference will be under minute scrutiny for signs that he is sticking to or diluting his Jackson Hole speech which departed from the text, leading some economists to believe Draghi had gone out on a limb as with his 2012 "whatever-it-takes" to save the euro speech.

Several economists now see a larger chance of the ECB embarking on QE in the coming months.

"QE is now largely unavoidable because inflation continues to persistently undershoot," said Citigroup economist Guillaume Menuet. He expects the ECB to announce such plans in December.   Continued...

European Central Bank (ECB) President Mario Draghi speaks during the bank's monthly news conference in Frankfurt August 7, 2014. REUTERS/Ralph Orlowski