Draghi Seen Overriding Opposition With QE as Gloom Deepens
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Mario Draghi is expected to go big in a final stimulus push as European Central Bank president, overriding protests from among his ranks that tools such as bond purchases aren’t yet needed.
More than 80% of economists surveyed by Bloomberg predict officials will announce more quantitative easing next week. They see the ECB’s deposit rate being reduced by 10 basis points to a record-low minus 0.5% in September, and expect a second cut of the same magnitude in December.
Draghi, who leaves his post in October and is set to be replaced by outgoing IMF chief Christine Lagarde, argued in July before the ECB’s summer break that the “outlook is getting worse and worse.” Since committing to reviewing a swathe of policy options, indicators haven’t signaled that a turning point is in sight. Yet some decision makers have argued that an aggressive package isn’t warranted, pushing back against market expectations they say have gone too far.
By easing, the ECB would join a wave of policy-loosening by central banks as the global economy cools because of protectionism and geopolitical tensions. The U.S. Federal Reserve might follow a week later with its second rate cut of the year, and the Swiss National Bank is seen as likely to reduce its key rate further below zero if the ECB acts.
Officials including Germany’s Jens Weidmann, Dutchman Klaas Knot, and Estonia’s Madis Muller are among those who have recently expressed skepticism over the need for bond buying, saying it would be disproportionate to economic conditions.
Former ECB Vice President Vitor Constancio told Bloomberg TV on Friday that investors might have outsized expectations for action as “we’re not in a recession and you don’t need a big package right now.”
While some economists including those at Morgan Stanley have scaled back their expectations in response, the median estimate among survey respondents is for a resumption of purchases at a pace of 30 billion euros ($33 billion) a month for one year. According to Bloomberg Economics, a program of such magnitude would require tweaks to existing guidelines that limit how much of a nation’s debt can be bought.
What Bloomberg’s Economists Say
“Bloomberg Economics expects the ECB to purchase 45 billion euros a month in bonds for one year. That should be accompanied by a 10 basis point reduction in the deposit rate and the introduction of a tiering system.”
--David Powell and Maeva Cousin. Read their ECB INSIGHT
Economists in the survey also see the ECB introducing mitigating measures to contain side effects from negative rates.
“A risk exists that the ECB compromises on a less-bold package than our expectations,” said Danske Bank analyst Piet Christiansen. “However, the ECB’s credibility is on the line.”
Any expansion of unconventional measures -- whether through interest rates or bond purchases -- would mark a profound shift from late last year when officials were preparing to wind down monetary support.
Since then, growth momentum has slowed significantly, and economists expect the ECB to revise down its outlook for growth and inflation yet again. Trade is still dominating the list of concerns, followed closely by a disorderly departure of the U.K. from the European Union.
Economists as well as policy makers have argued that even a comprehensive easing package will do little to help the region in the event of a deeper economic crisis if it isn’t accompanied by help from other actors.
Lagarde, who’s on track to join the ECB in November, said earlier this week that countries with room for spending should use it, and called for a European-level fiscal capacity.
“The ECB’s main priority will be to encourage euro-area governments to pursue fiscal stimulus,” said Alastair Winter, economic adviser at Global Alliance Partners. “Lagarde was parachuted in to the ECB to build a consensus for a cocktail of loose monetary and fiscal policies.”
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