Divyang Shah
IFR Senior Strategist
The latest monthly report from the Bundesbank (BBK) signals an acceptance of the recent easing from the ECB but appears to be preparing the ground for a bigger battle over QE. The BBK says that accommodative ECB monetary policy is justified given low eurozone inflation but despite likely resistance from Germany/BBK, the ECB is still likely to communicate that it will not rule out QE.
A soft and limited version of QE was an idea floated by ECB’s Asmussen last month with the suggestion that the SMP could be left unsterilized. But more striking were the comments from ECB chief economist Peter Praet last week where “outright purchases” were not excluded should the ECB’s mandate be at risk.
Over the weekend Praet seems to have tone down this view by saying that at zero interest rates “quantitative measures” can be deployed and that this includes these do not have to be a bond programme and can also include liquidity injections.
It is important to remember that the German/BBK voice on the direction of ECB policy has impacted the timing but not the delivery of further monetary policy measures such as the SMP and LTROs. The lack of influence was a factor in the resignation of Weber (BBK president, ECB member) and then Stark (ECB Executive Board member) in 2011.
It probably won’t be long before we learn that contingency plans in the form of QE preparations are being made, which is similar to what the ECB has been doing on the potential for a negative deposit rate.
Remember that beyond the uneven nature of the eurozone recovery and low inflation we still have the risk that the AQR/stress tests could accelerate bank deleveraging further impacting a broken monetary transmission mechanism.
The comments from Praet should be seen as the start of the ECB’s campaign to communicate that it is not averse to thinking beyond ZIRP.
