FRANKFURT (Reuters) - Momentum is building for the European Central Bank to launch a program of sovereign-bond buying to boost the struggling euro zone economy with most signs pointing to March for a decision.
With Germany, Europe’s economic powerhouse, refusing to unleash fiscal stimulus and other governments taking time to reform their economies, responsibility is falling on the ECB to bolster growth and fend off deflation.
It is arguably becoming more urgent. Euro zone inflation slowed to 0.3 percent last month, far below the target of just under 2 percent and in what the ECB sees as a “danger zone”.
Growth, meanwhile, has stalled, with some of the euro zone in recession and the bloc as a whole just above water.
Printing money to buy bonds - known as quantitative easing, or QE - would in theory boost both inflation and add to growth.
Reflecting this, ECB President Mario Draghi opened the door in a Nov. 21 speech to stronger stimulus. His deputy, Vitor Constancio, went a step further last week, saying the bank would be better able to gauge in the first quarter whether to buy sovereign bonds.
“Now, it’s too soon to make that assessment but indeed in early 2015 we have to look and assess if the (existing) programs are having the effect that we are expecting,” Constancio told Reuters in a television interview.
That has many looking to the ECB’s March 5 meeting for a QE launch. The two before then - in December and January - are seen as too soon; afterwards some believe it may be too late.
The bank has already begun buying covered bonds and bundled loans known as asset-backed securities (ABS) to try to stimulate those markets and generate new funding options for smaller firms, as well as to also increase the size of its balance sheet, or the amount of money being pushed in to the economy.
But these measures may fall short of the bank’s goal of expanding its balance sheet back to levels seen in early 2012 - around a trillion euros higher than today. Inside the ECB, the balance sheet size is key to determining whether to launch QE.
Draghi’s words and updated forecasts from ECB staff will be closely scrutinized when the bank holds its December policy meeting on Thursday, but this week is too early for the ECB to decide on QE.
A Reuters poll on Monday show no expectations for action at this week’s meeting.[ECB/REFI]
Before acting, policymakers first want to assess the impact of their ABS purchases, which they only began last month, and the take-up of new ECB loans to banks on Dec. 11, another project to pump money into the economy.
After Thursday, the next chance to pull the trigger on QE would be Jan. 22 - 2015’s first monetary policy meeting, but probably too soon to have built consensus. Because the Governing Council will have only eight such meetings next year instead of 12, the meeting after that is March 5.
Although the ECB Governing Council could agree on QE without unanimity, Draghi needs to build a strong consensus, particularly given resistance in Germany on both historical and policy grounds.
Sabine Lautenschlaeger, a German executive board member, said as recently as Saturday, for example, that the potential benefits of QE did not currently outweigh the costs.
Another argument is that interest rates in the euro zone are already so low that QE would have little impact.
But Constancio argued last week that QE would free up investors’ funds for them to buy other assets, weigh on the euro’s exchange rate, and signal the ECB’s intent to anchor inflation expectations.
ECB staff will update their forecasts again for the March 5 meeting. What they say could be the deciding factor.
If it isn‘t, some in the market argue that by then the economy may have sunk too far.
Editing by Jeremy Gaunt