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Stephanie Flanders: Will the ECB call on quantitative easing?

The European Central Bank is worried about low inflation but is it ready to take action?


The governors of the European Central Bank are not always the best communicators but this time the message from Frankfurt has come through loud and clear: the ECB is concerned about the continuing low level of European inflation and is prepared to do something about it. Whether it is ready to match words with deeds is another matter.

In his latest press conference, ECB’s president Mario Draghi took the rhetoric up another notch, admitting for the first time that the strengthening of the European currency was a matter of “serious concern” in an environment of low inflation. 

He also suggested that ECB governors were not happy with the current low forecasts for inflation and that they would be comfortable taking policy action to confront the problem at the next meeting in June.

Does this mean the ECB is about to launch a UK- or US-style policy of quantitative easing, buying government bonds in a bid to get more cash flowing through the eurozone economy? On balance, we think not, or at least not in the near future.

But it is being given more serious consideration than in the past. Indeed, the governing council has now stated its “unanimous commitment to using unconventional instruments within its mandate to cope effectively with risks of a too prolonged period of low inflation”.

Slow progress

Why the change in tune? The short answer is low inflation and a deeply inconvenient strengthening of the euro. Recent data shows the eurozone economy still improving, but the pace of improvement is still slow. Core and headline inflation are well below target, and there is little inflationary pressure in the economy.

Eventually, the ECB believes the lending figures will start to pick up. But right now it is painfully aware that the momentum in the economy has not been enough to offset the downward pressure on domestic prices from high unemployment and the stronger euro.

The question is whether QE will be the ECB’s first port of call, and whether it would really address the region’s problems.

If QE is going to support credit growth and lending in the weakest parts of the eurozone economy, proponents have suggested the ECB should buy private corporate bonds rather than government debt. This would get around having to buy bonds from all member governments and lessen concerns – in the Bundesbank and elsewhere – about the ECB seeming to finance government deficits.

There are plenty of private corporate bonds the ECB could buy. But spreads in European credit markets have largely been narrowing; almost by definition, the companies that can already access this market are not the ones the ECB would need to help if it were going to make a difference.

That points in the direction of buying asset-backed securities linked to loans to small and medium-sized companies. But this market is tiny in most of the countries that are now in worst shape.


Strong euro is a problem for all

These arguments have tended to silence debates about QE in the past: if it cannot target the problem the ECB needs to fix, why bother doing it all? But the strength of the euro changes the conversation because the stronger currency is a problem for all of the eurozone, not just crisis countries. 

And the euro would almost certainly fall – or at least stop rising – if Mr Draghi and his colleagues shocked the world and announced they were going to buy a large amount of government bonds.

We do not think that will happen next month. More modest moves such as a further cut to the main policy rate seem more likely. But ECB officials understand the power of surprise in this environment. They are also painfully aware that their own rhetoric – and the markets’ response to it – may yet force them down the QE path.

If inflation drifts lower again in the next few months, the market will call the ECB’s bluff and it will need to deliver.

Stephanie Flanders is chief market strategist, UK & Europe, at JP Morgan Asset Management



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  1. good day for golf 30th May 2014 at 12:42 pm

    I have never understood this buying your own debt as being printing money and how it helps the economy.

    I think I favor the Roosevelt approach building infrastructure like the Hoover dam, highways and bridges.

    Old fashioned and maybe simple but it got people working.

    This electronic stuff and buying gilts and treasuries seems like a bankers dream and does not seem to trickle down to the real economy.

    I wonder if a more direct approach would work?

    My own example is I bought an apartment in Spain – cheap 18 months ago but it was very hard to fund with a mortgage.
    I pay 5.6% interest rate when the true rate should be 2% so that’s a hefty profit to the Spanish bank given they borrow at 1/2%.
    But that puts many investors off particularly given the 40-50% equity requirement . And yet the UK does not have any problems giving people 95% loans and they don’t even have spare housing capacity! Sorry but in my head it would have seemed more sensible for Spain to be doing this.

    Then there is the question of twenty golf courses all around Marbella charging 100 euros a round of golf. The courses are empty people will not pay these rates. So the local economy also suffers because golfers don’t get on planes, buy meals, hotel stays etc… Would it not be a good idea for Spanish government to take the golf courses or buy them since they are bust anyway. Then charge 20 euros a round of golf and watch the planes fill up with golfers off to Spain and all the additional income benefits it brings to the local economy.

    While we’re at it – take over or charter the airlines and drop the prices to Spain. The cost to fly now are very high and unattractive.

    Stop local banks from charging extortionate rates on loans and offer government guarantees to them on the loans and back them between the 95-75% loan to equity. All of a sudden we get rid of the glut in apartments. And what is the risk to the EU on all this? Very little as the apartments are already going half price. The Uk government are backing mortgages and almost everyone says the uk house prices are overpriced – so that does not make sense either.

    When Bernanke talks of easing, tapering, buying US debt to help the economy surely the general public does not have a clue what he is talking about! I don’t and I studied economics. Similarly Draghi is talking about it.

    There is pressure in Europe and tension, we are not lowering the unemployment rate, the gap between haves and have nots is widening. It can’t go on indefinitely. Half the youth are leaving college with qualifications and employers are saying sorry you need 5 years experience too. We need jobs not ‘easing’ whatever the hell that means.

    Even if it were the wrong approach to directly invest in the economies at least the general public would understand it. I don’t think it’s the wrong approach but there seems no debate about it. Bernanke is frequently quoted as being an expert on the depression years and yet he has not followed any of the solutions that Roosevelt implemented.

    On the extreme side past history has shown tensions break out and war is the result. Previously that has kind of been an economic solution – a dreadful one no reasonable thinking person wants to follow.

    Guides to investing tell you not to invest in something you do not understand yet the world seems to have all followed Bernankes lead- Japan now Europe? I am sorry but I don’t think it works it certainly does not appear that way.

    I heard a quote that Bill Gates looks for a lazy guy to do a difficult job since he will find the simplest solution. I think we can all agree Bernanke and Draghi are not lazy. Really I don’t think these politicians have any idea of what they are doing. Common sense appears to be lacking.

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