http://www.wsj.com/articles/ecb-keep...ged-1417697312
ECB’s Draghi Opens Door to New Stimulus, But Not YetBy BRIAN BLACKSTONE
Updated Dec. 4, 2014 3:02 p.m. ET
FRANKFURT—The European Central Bank opened the door to a dramatic escalation in its campaign to stimulate the eurozone’s stagnant economy, but deferred any moves until early 2015 amid signs of continuing divisions over the right course of action.
ECB President Mario Draghi said Thursday that officials discussed purchases of government bonds, otherwise known as quantitative easing, a move that would mark a new chapter in the bank’s fight against excessively weak inflation. But he added they needed more time to gauge the effects of policies that they had already implemented while assessing how falling oil prices might affect the region’s already weak consumer prices.
“We discussed the possibility of doing QE” with buying government bonds “as one option,” Mr. Draghi said after the ECB left its key interest rates unchanged at record lows at the bank’s monthly meeting. The ECB will reassess its policies early next year and decide whether it needs to do more, Mr. Draghi said, raising expectations that the ECB could act as soon as its next policy meeting on Jan. 22, although he didn’t commit to a time frame.
“Early means early. It doesn’t mean at the next meeting,” Mr. Draghi said.
Financial markets reacted negatively despite Mr. Draghi’s suggestion that bolder action could come soon, as investors had hoped for a more ironclad commitment to begin large-scale bond purchases, a policy that has been used extensively by central banks in the U.S., the U.K. and Japan. European and U.S. stocks fell Thursday, and the euro rose on Mr. Draghi’s comments.
“They’re almost there but not quite over the line,” said Ken Wattret, economist at BNP Paribas. “The pieces of the jigsaw are falling into place.”
The ECB opted against immediate action despite an annual inflation rate of 0.3% in the eurozone in November, far below the central bank’s target of just under 2%. The ECB lowered its 2015 forecast for consumer-price growth to 0.7% from 1.1% and in 2016 from 1.4% to 1.3%. The inflation forecasts didn’t fully incorporate the most recent drop in oil prices, which could push inflation even lower.
“On the basis of their projections, any other central bank would have announced a policy change,” Mr. Wattret said.
Mr. Draghi’s remarks contained a number of hints that more central-bank stimulus may be coming to Europe soon. He said the ECB would be “particularly vigilant” about the effect the sharp reduction in oil prices could have on consumer prices and expectations for future inflation, using a phrase that his predecessor, Jean-Claude Trichet, often deployed to signal imminent ECB action.
Draghi Now Needs Help From The Markets, Says AXA Mario Draghi will have to hope that markets do not turn against him in the next quarter after announcing that the European Central Bank would take no further action to boost liquidity for at least three months, said John Porter, head of fixed income at AXA Investment Management. “He’s looking to buy time but it does beg the question of why the ECB is not acting now?” said Mr Porter. “Hopefully the markets will give him time.... There’s always the possibility they lose patience.” That could mean markets are in for a volatile couple of weeks. (juliet.samuel@wsj.com)
Draghi Comments Confirm Expectation of QE in 1Q, Says Barclays Today’s ECB monetary policy announcement and President Draghi’s remarks cement Barclays’s expectation that the ECB will announce QE in the first quarter of next year and it could even come in January, they said in a note. They say they expect December headline inflation to fall to 0% in the eurozone and they also see an additional weakening of inflation expectations, a key indicator for the ECB. This “would add to pressure on all ECB Council members to support further measures including the purchase of government bonds at the 22 January policy meeting.”
Mr. Draghi said the bank intended to raise the size of its balance sheet to early 2012 levels, implying a rise of around €1 trillion ($1.24 trillion). That was a firmer objective than in November, when the bank said it expected its current policies—which include cheap, four-year loans to banks and purchases of covered bank bonds and asset-backed securities—to achieve this rise.
But the small shift in language was met with resistance within the ECB’s 24-member governing council. Mr. Draghi said a vast majority approved the change to the balance-sheet language, signaling some opposition.
Jens Weidmann, the head of Germany’s powerful central bank, was among the dissenters, a person familiar with the matter said, because he didn’t want the ECB to commit prematurely to full-blown quantitative easing. The other German member of the governing council, executive board member Sabine Lautenschläger, has signaled resistance to buying government bonds. Quantitative easing is unpopular in Germany, Europe’s largest economy, where the policy fuels deep-rooted fears of inflation and the use of central-bank money to finance wasteful government spending.
Mr. Draghi suggested that the ECB would move even in the face of German opposition if the ECB’s inflation target was at risk. “We don’t need unanimity” to launch quantitative easing, he said, adding that he was confident a program could be designed to achieve a consensus within the ECB, if needed. The ECB could also purchase other private-sector assets, he said, saying officials have discussed all types of assets except gold.
Despite the negative reaction in financial markets, which may have grown overly optimistic about imminent ECB moves, the prospects for large-scale government bond purchases increasingly appear to be a question of when rather than if.
When interest rates are near zero, as is the case with the ECB and other large central banks, the main lever to stimulate the economy is through purchases of assets with newly created money that increase the size of a central bank’s balance sheet and reduce borrowing costs for governments and the private sector.
Quantitative easing also typically weakens the exchange rate, boosting exports and inflation. Mr. Draghi said the policy was shown to be effective in the U.S. and U.K., although it is a tougher call for Japan, given other challenges that economy faces.
His comments underscore the divergent paths of major central banks as their economies recover at different speeds. The U.S. Federal Reserve and the Bank of England are expected to start raising interest rates next year as their economies see faster, jobs-rich recoveries than in the eurozone. In contrast, Japan and the ECB are ramping up their stimulus drives.
Still, doubts persist as to whether even more aggressive stimulus measures from the ECB will restore economic vitality to the eurozone, whose $13.2 trillion economy is the world’s second largest after the U.S. Yields on European government and corporate bonds are already very low, suggesting further declines will have little traction on the economy unless they are matched by fiscal stimulus and reform measures to raise the growth potential of struggling European economies.
Quantitative easing “is necessary to keep the economy out of recession and avoid another round of financial turmoil,” said Mark Zandi, chief economist at Moody’s Analytics. “But I don’t think it is sufficient” without economic reforms in France and Italy.