Looking to the ECB to move the dial

Sun Jan 18, 2015 4:22am EST
 
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By Mike Peacock

LONDON (Reuters) - After a head-spinning bout of volatility, next week will be dominated by one question: Will the European Central Bank take the ultimate policy leap or pull its punches?

The ECB could launch a government bond-buying program with new money as soon as its Jan. 22 meeting, although Greek elections three days later are a complication.

With markets in an unusually febrile state - oil and copper have plunged while the Swiss franc rocketed after Switzerland abandoned its currency cap - it's a fair bet that if the ECB holds back, there will be an extreme reaction.

The euro zone's central bank would have no problem justifying action. It is mandated to deliver price stability and inflation close to 2 percent whereas this has just turned negative and is likely to fall further given the precipitous oil price drop.

The ECB won crucial backing last week for its pledge to do whatever it takes to support the euro when a top European Union court official said there was no legal impediment to buying government bonds to bolster a listless euro zone economy.

But politics and German concerns about risk-sharing will trump the law.

Sources have told Reuters the ECB may adopt a hybrid approach - buying debt and sharing some of the risk across the euro zone while national central banks make separate purchases of their own. The program may also be limited in size to 500 billion euros ($578 billion).

But it is possible that the European court judgment will embolden the ECB. Executive Board member Benoit Coeure said on Friday that QE had to be big to have an impact.   Continued...

 
The famous euro sign landmark is photographed outside the former headquarters of the European Central Bank (ECB) in Frankfurt, late evening January 8, 2015.   REUTERS/Kai Pfaffenbach