ECB set to talk up stimulus measures but hold fire

[FRANKFURT] The European Central Bank, at its final meeting of the year on Thursday, will prime the markets for new anti-deflation measures, but will wait until early next year to act, analysts said.

Given the alarming drop in eurozone inflation in recent months, the heat has increased on the ECB to undertake massive stimulus measures like central banks in Britain, Japan and the United States have done.

According to official data, inflation in the 18 countries that share the euro slowed to 0.3 per cent in November from 0.4 per cent the previous month, feeding fears of imminent deflation.

Falling prices may sound good for the consumer, but they can trigger a vicious spiral where businesses and households delay purchases, throttling demand and causing companies to lay off workers.

The ECB is scheduled to publish its own latest updated inflation and growth forecasts and is worried that medium-term inflation expectations could become permanently de-anchored from its target of around 2.0 per cent.

The ECB has already launched a multi-pronged offensive against deflation, cutting its interest rates to new all-time lows, making unprecedented amounts of cheap loans available to banks via its LTRO and TLTRO programmes, and unveiling asset purchase programmes (ABSs and covered bonds) to pump liquidity into the financial system.

But it has also hinted at more radical action in the form of quantitative easing (QE), a policy used by other central banks around to stimulate their sluggish economies.

QE is the large-scale purchase of government bonds and such a policy has many critics in Europe, not least the German central bank or Bundesbank, because it is felt that it takes the ECB outside its remit and is effectively a licence to print money to get governments out of debt.

"The ECB will aim to send out a strong message this Thursday that it will do what it takes to raise inflation and inflation expectations as fast as possible," said Berenberg Bank economist Christian Schulz.

"Even if it does not step up its actions just yet, it will choose language for the statement that makes additional easing a near certainty for the first quarter of 2015," the expert said.

"The question is no longer if, but when and what." Last week, the ECB's number two, Vitor Constancio, said the central bank would be in a position to gauge whether the previous stimulus measures are working in the first quarter of 2015.

"If not, we will have to consider buying other assets, including sovereign bonds in the secondary market," Constancio said.

Just days prior to that, ECB chief Mario Draghi had vowed to "step up the pressure and broaden even more the channels through which we intervene ... without any undue delay." Nevertheless, ECB-watchers are sceptical that QE will be announced as soon as Thursday.

"With little action and much emphasis on the feel-good factor and good team spirit, this week's ECB meeting should fit into the contemplative pre-Christmas atmosphere," said ING DiBa economist Carsten Brzeski.

"At the very least, we expect the ECB to indicate that it is planning more aggressive purchases in the nearer term," said Ben May at Oxford Economics.

AFP