Fra BNP Paribase
We expect more clarity on the issue at this week’s press conference, with Mr Draghi likely to stress that the ECB’s objective is to reverse the shrinkage of its balance sheet since 2012 (down by around EUR 700bn to EUR 1trn, depending on the reference point). If that goal is to be achieved within a reasonable timeframe – of one year, say – the ECB is going to need to undertake further measures on top of what it has already announced and we expect the communication at the press conference next week to be consistent with this. We had been forecasting a broadening of asset purchases from the ECB in Q1 2015. After September’s announcements, the ECB’s intention was clearly to take some time to assess the effect of its existing initiatives. We doubt that the ECB still has “a few months” to make up its mind, in reality, due to weaker growth, stubbornly low inflation, tighter financial and monetary conditions (Chart 1) and the increasing risk of inflation expectations becoming unanchored.
Our sense is that a majority of Council members, including the president, are of the view that the ECB could and should have delivered more substantial policy easing. What’s more, the September press conference reinforced that decision making at the ECB can be done with a majority rather than requiring unanimity. We think that this type of decision-making process will again prevail leading to further policy expansion in December. There are pros and cons to all options available to the ECB. If it wants to avoid purchases of sovereign bonds, there are alternatives. But most have the same drawback – a lack of scale, making it harder for the ECB to expand its balance sheet quickly. However, the size of the problems facing the ECB means that sovereign QE is now in our central scenario and could be delivered as early as December.
