Draghi prepares to unveil easing proposals / Financial Times

January 22, 2015 3:08 am

Draghi prepares to unveil easing proposals

Claire Jones in Frankfurt / http://www.ft.com/intl/cms/s/0/b6525ff6-a18c-11e4-b176-00144feab7de.html?siteedition=intl#axzz3PXB4wfCw

The European Central Bank is on Thursday set to follow the lead of the US Federal Reserve, the Bank of Japan and the Bank of England and embark on quantitative easing The momentous decision on sovereign bond buying in the eurozone is expected at 1.30pm GMT. Here is what to look out for when Mario Draghi, ECB president, unveils the programme.

Size and pace

Rather than announce a fixed stock of purchases, the ECB looks set to promise to buy an amount of bonds each month for a certain period of time.

The central bank has mooted purchases of €50bn a month for between one and two years to policy makers on its governing council.

If policy makers support the idea, then the ECB programme would comfortably beat market expectations of its size. Analysts polled by Bloomberg, on average, expected the ECB to buy €550bn-worth of sovereign bonds.

Buying at a pace of €50bn per month would be broadly in line with forecasts.

Level of commitment

As important as the size of the programme is the strength of the ECB’s commitment to meet its inflation target.

Prices in the region are falling and inflation has been less than half the ECB target of below but close to 2 per cent for more than a year. Investors want a strong signal from the governing council of its commitment to pursue further, and more aggressive, QE should what is tabled tomorrow fall short of bringing inflation back to the target.

Watch out for any change in the ECB’s rhetoric on its intention, announced last month, to swell its balance sheet to the €3tn mark last seen in early 2012.

The ECB balance sheet stands around €2tn and it has not specified when it intends to hit the €3tn mark. The ECB is not expected to announce a Fed-style promise to keep going with asset purchases until it hits a certain numerical target, however. Under its third QE programme, the Fed said it would purchase $85bn of assets a month until unemployment fell to 6.5 per cent.

However, the experience of the BoE in linking its commitment to keep rates at their current record lows until unemployment hits 7 per cent has highlighted the perils of this approach. The BoE did not expect to hit that goal until midway through 2016, but unemployment dipped below the 7 per cent threshold in January 2014.

Risk sharing

One of the fiercest debates at Thursday’s meeting will take place on the thorny issue of whether national central banks should shoulder responsibility for losses from a restructuring or default of their national debt.

The ECB is willing to break with its tradition of sharing responsibility for losses to appease concerns that sovereign bond buying will lead to a redistribution of risks from the periphery to taxpayers in the core.

While the German and Dutch central banks are keen on the proposal, it has met with fierce resistance from other national central bank governors and finance ministries who think it undermines the ECB’s commitment to monetary union.

Greece

The leftwing Syriza party’s expected win in Sunday’s election has highlighted concerns over the impact of QE on burden sharing between eurozone member states.

The party is pressing for an end to austerity and a restructuring of Greece’s debt.

The ECB is expected to allow countries with junk ratings to take part in QE, but only if they meet certain conditions regarding reform programmes. The central bank could word those conditions in a way that would exclude Greece from any immediate assistance.

Unanimity

A united front is very unlikely. Jens Weidmann, the Bundesbank’s president, and Sabine Lautenschläger, the German member of the ECB’s executive board, have both made clear they believe economic conditions do not warrant QE. Both view the chances of a vicious deflationary spiral as slim.

Other potential objectors include executive board member Yves Mersch.

QE sceptic Klaas Knot, who heads the Dutch central bank, signalled last week he would support bond buying if the national central banks shouldered the responsibility for losses from purchases of their national debt.