Pictet Calls on ECB to Go Big With QE to Deliver on Inflation
Pictet Calls on ECB to Go Big With QE to Deliver on Inflation
(Bloomberg) --
The European Central Bank should come up with a sizable quantitative-easing program if policy makers are serious about delivering on their price-stability goal, according to Pictet & Cie strategist Frederik Ducrozet.
In a note note entitled “Go Big, or Go Home” Ducrozet argues the ECB needs bond buying of at least 600 billion euros ($662 billion) to close the current gap between current inflation and the target of just under 2%. His note comes as President Mario Draghi is facing considerable pushback against resuming QE. His eight-year term ends in October.
“The effects of QE on inflation can be discussed at lengths, but if the ECB disappoints in September the risk is that it has to do much more in the future,” Ducrozet says. “If you want to do QE, you might as well do it properly.”
Several policy makers including Dutch central banker Klaas Knot and his French colleague Francois Villeroy de Galhau have come out in recent days saying bond-buying may not the be the right tool for the ECB to deploy at this point, arguing a rate cut should be used to deal with the euro-area slowdown. The Governing Council will meet on Sept. 12 after Draghi primed markets for renewed stimulus in July, with expectations running high for a package of measures that would also include more QE.
The Governing Council could reach reach a compromise by supporting a QE program with a smaller volume of monthly purchases -- 30 billion euros over 18 months or 25 billion euros over 2 years, Ducrozet speculates. Another option could be to keep the program open-ended, depending on the evolution of the economy in the future.
“In the end, it’s all about creating fiscal space” for governments to boost spending, according to Ducrozet. He expects the ECB to lift limits of how much bonds it can buy from single government issuer to 50% from 33%.
To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint, David Goodman
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