The slowdown in the eurozone economy raises speculation about what money Mario Draghi can use if the European Central Bank decides that growth and inflation are at stake.
The euro area’s economic slowdown is fostering speculation over what tools Mario Draghi might deploy if the European Central Bank decides that growth and inflation are at risk.
A continuation of the disappointing data could force the ECB president and his colleagues to downgrade the institution’s economic forecasts at their Dec. 13 meeting. They might also describe the risks to growth as tilted to the downside, instead of the “broadly balanced” phrase they’ve used for more than a year.
If the outlook does prove so bleak, here are some of the measures at hand.
The ECB currently anticipates halting its 2.6 trillion-euro ($2.9 trillion) bond-buying program at the end of December. But that’s only if incoming data confirms that price stability is within sight. An extension of purchases looks unlikely, but it can’t be ruled out.
The ECB might instead tweak its guidance on interest rates to push out the date when investors predict a first hike, currently seen in late 2019. That’s a view backed by Tuuli Koivu, a senior analyst at Nordea Bank AB. Barclays economist Fabio Fois says signaling a later liftoff might be easier as “the bar for re-entering quantitative easing is very high.”
Some policy makers have already started brainstorming publicly about how they might map out the path of rates next year to calm market nerves.
The ECB doled out more than a trillion euros of cheap four-year loans to banks from 2014 to 2017, and some of those funds may need to be refinanced from next year. To stave off concern about that cliff-edge, policy makers could opt to offer a new round of funding, even if on a smaller scale.
Banks have already been in contact with the ECB on the matter. This allow the ECB to target the tightening of financial conditions where it really matters.
ECB might consider echoing the U.S. Federal Reserve, which tweaked the structure of its holdings to target longer-dated assets and rein in longer-term market rates. Another option might be to pledge to keep reinvesting for longer than the two years that economists currently predict.
Draghi has insisted that spillovers from Italy’s budget dispute with the European Union, which has pushed up the nation’s bond yields, are limited so far. Should that situation worsen though, he might find he has to step up to his “whatever it takes” pledge to save the euro.
That means Outright Monetary Transactions, unlimited purchases of a country’s sovereign debt tied to a program of structural reforms. Italy’s government would have to ask for it though -- something the populist administration doesn’t seem willing to contemplate.
A drastic measure, so it would take a lot to push the ECB to such an extreme step. It would also leave the central bank with even less ammunition to fight the next downturn. Pacific Investment Management Co.’s Andrew Bosomworth already expects the ECB to struggle to lift its deposit rate much above zero before it’s constrained by a U.S. slowdown.
Source: Bloomberg Finance L.P.
Graphs: Used with permission of Bloomberg Finance L.P.
Read more:
25 Canada Square, Level 33, office 50, Canary Wharf London, E14 5LQ +44 20 3608 6256
World Financial Markets - 0700 17 600 Varchev Exchange - 0700 115 44
Varchev Finance Ltd is registered in the FCA (FINANCIAL CONDUCT AUTHORITY) with a passport in the United Kingdom: FCA, United Kingdom - registration number: 494 045, which allows provision of financial services in the United Kingdom.
Varchev Finance Ltd strictly comply with the statutes of the European directive MiFID (Markets in Financial Instruments). targeting increased efficiency, transparency and uniformity of financial instruments.
Varchev Finance Ltd is authorized and regulated by the Financial Supervision Commission - Sofia, Bulgaria: License number RG-03-02-05 / 15.03.2006
The information on this site is not intended for distribution or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
Disclaimer:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 63,41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.