|
 A slight upward surprise in euro zone inflation in February and
initial signs of life in some economies in the region have eased
pressure on the ECB to take radical steps.
Quantitative easing — actually buying assets to drive money into the
system as the U.S. Federal Reserve and others have done — is
politically far too difficult.
Imposing negative deposit rates, essentially charging bank
depositors, is also controversial within the euro zone bloc and
might not be effective.
But with inflation running in the ECB's "danger zone" below 1
percent — 0.8 percent at last count — the bank is poised to open
some money spigots by ending operations to drain funds from the
financial system.
The ECB currently "sterilizes" money it puts into the system though
bond purchases by withdrawing other money to offset the effect.
Stopping this would mean more money available for lending.
The step is easier to swallow for the Bundesbank, Germany's
conservative central bank, and meets market expectations for some
action by the ECB signaling its resolve to maintain its
accommodative policy stance for an extended period of time.
"This could be the compromise solution," said Nick Matthews,
economist at Nomura.
"It helps those (at the ECB) who are still unsure about a negative
deposit rate and don't see that there is room to cut the refinancing
rate on its own anymore. So this would be seen as the ECB doing
something."
The International Monetary Fund, however, believes the ECB needs to
do much more.
Reza Moghadam, the head of the IMF's European Department said in a
blog on Wednesday that the ECB should cut interest rates and pump
out more money, perhaps through quantitative easing.
Nonetheless, ending sterilization is the prime option for ECB
policymakers at Thursday's meeting.
An ECB source predicted there would be unanimous agreement to end it
for bond purchases under the bank's Securities Markets Program (SMP).
Separately, Draghi's predecessor as ECB president, Jean-Claude
Trichet, told reporters in Abu Dhabi that ending sterilization is
"something which is certainly possible taking into account the
present situation."
[to top of second column] |
2016 PROJECTIONS
The Governing Council will, for the first time, publish staff
forecasts stretching into 2016 when it meets. Draghi described this
as "a very significant change in our analysis" after the bank's
February 6 policy meeting.
Draghi has set out two scenarios that could trigger fresh action: a
deterioration in the medium-term inflation outlook and an
"unwarranted" tightening of short-term money markets.
Many analysts predict ending sterilization is only the start of the
ECB's long battle to fight off deflation risks, with a growing
minority of economists polled by Reuters last week saying the bank
may be forced to print money this year.
Despite insisting that the euro zone is not experiencing deflation,
Draghi warned on Monday that inflation is "way below" the bank's
goal and if it stays so for too long, it will be harder to get it
back up to the target.
Looming in the minds of policymakers are fears of a Japan-style
deflation, which became so entrenched companies and households held
off on spending on expectations of lower prices ahead, leading to
two decades of economic stagnation.
Like the Bank of Japan, which meets to set policy next week, the ECB
is running out of room to cut interest rates. Its main refinancing
rate is at 0.25 percent and the deposit rate it pays banks for
holding their money overnight stands at zero, raising a question
over how potent a small rate cut would be.
Ending the SMP sterilization operations would lack the "wow" factor
of such quantitative easing but would show the ECB is being
proactive and delivering on its pledge to keep an accommodative
policy stance and take fresh action if needed.
(Additional reporting by Paul Carrel in
Frankfurt and Martin Dokoupil in Abu Dhabi; editing by Jeremy Gaunt)
[© 2014 Thomson Reuters. All rights
reserved.] Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
