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Draghi to Expand QE Fearing Shallow Recovery

Draghi to Expand QE Fearing Shallow RecoveryDraghi to Expand QE Fearing Shallow Recovery

Mario Draghi's promise that the European Central Bank is willing to step up its stimulus if needed, is resonating with economists, who see the eurozone recovery as too shallow to be sustained.

More than two-thirds of respondents in a Bloomberg survey predict the ECB's president will expand or extend the €1.14 trillion ($1.3 trillion) quantitative-easing program, and almost all of those say he'll do so within nine months. While an increasing number of respondents see the economy improving for now, they're also fretting that the upturn won't last long.

The ECB's governing council has already shown concern that a slowdown in global trade will erode exports, a pillar of the regional recovery, before domestic demand is strong enough to compensate. The central bank this month cut its growth and inflation forecasts and Draghi told reporters that QE is flexible in size, duration and composition. In contrast, the Federal Reserve may raise its interest rates as soon as this week.

Inflation Close to Zero

"QE risks becoming a semi-permanent feature," said Gianluca Sanna, a portfolio manager at Banca Monte dei Paschi di Siena SpA in Milan. "While it's certainly true that the eurozone is indeed going through a phase of decent, maybe even above-potential, output growth, chances are that there is nothing self-sustaining in what we are seeing right now and the eurozone ends up again in a low-growth environment with inflation dangerously close to zero."

In the survey, 68% of the 41 economists polled said the ECB will step up its QE program. Of those who provided a timeline, 65% predict an announcement by December and 87% see a commitment to more stimulus by March.

Nearly four-fifths of the respondents who expect a bigger QE program, see the ECB extending its duration beyond the initial end-date of September 2016. About 43% said the monthly purchase amount will be lifted above the current €60 billion, and 29% said the central bank will broaden the range of assets it buys.

Long-Term Loans

The Frankfurt-based central bank has other options, though with less control over their scale. The fifth round of its targeted long-term loans to banks–aimed at rekindling lending to companies and households–will take place next week. Economists predict banks will opt to take up €70 billion, compared with the €73.8 billion they borrowed in June. The loans fall due in September 2018 and are charged at the benchmark interest rate of 0.05%.

The 19-nation economy expanded 0.4% in the second quarter after 0.5% in the first. ECB data show credit standards eased and loan demand climbed in the second quarter. That bodes well for investment, which rose about 1% in the first half of the year.

"All options are open to the ECB as regards stepping up its QE program," said Alan McQuaid, chief economist at Merrion Capital Group Ltd in Dublin.

 

Financialtribune.com