Despite leading bank officials suggesting that the introduction of a quantitative easing (QE) package could be premature, the European Central Bank (ECB) looks increasingly likely to confirm such an arrangement at the key meeting on Thursday 12th September. The ECB are hopeful that this strategy will give fresh impetus to economies in the eurozone by stimulating lending and increasing inflation.
This would only be the second time that the ECB has deemed it necessary for such a large-scale injection of money into eurozone economies. Since ECB President Mario Draghi spoke of the possible considerations of QE and interest rate cuts in June, investors have adjusted accordingly to his dovishness. It appears that Draghi is now resolved to the type of strategy that he mooted in the summer.
Others are less enamored with his approach. Sabine Lautenschläger, member of the ECB Executive Board, spoke to Market News at the end of August about her opposition to the introduction of rate cuts and asset purchases. Lautenschläger shared her fears that it is “much too early” for such a move, as this type of package is usually deployed as a last resort with the looming menace of deflation.
The Executive Board member suggested it would be imprudent for such a dovish package at a time where deflation is not a genuine threat. Lautenschläger is not alone in her doubts, with French central bank President Francois Villeroy de Galhau among those to have echoed her concerns.
While Lautenschläger and others may have stated their concerns about such a substantial package, this market analysis has gained little traction among investors. Whether as the main thrust of the ECB’s strategy or as support to a wider QE package, cuts to interest rates look all but certain to be announced on Thursday. The Top Rated Forex Brokers’ guide to ECB meetings suggests that a dovish stance gives investors the chance to short the euro, an opportunity that many have already seized ahead of Thursday.
Draghi’s summer promise to stimulate the European economy has taken precedence for traders over the more hawkish stance from the likes of Lautenschläger. The ECB President is optimistic that cuts can provide the liquidity needed for Germany to pull itself away from the cliff edge of a recession.
German banks, among other leading European banks, feel that Draghi is overzealous and at risk of trying to deliver too much at once. Shweta Singh of TS Lombard advocated caution in a note shared on Wednesday. Singh indicated there is ‘little room for optimism on the European outlook’ at a time when Italy’s economy is stagnant and the German economy is weakening.
Most estimates for ECB’s renewal of asset purchases fall around the monthly mark of €25 billion, a figure that may be insufficient to make a significant impact in closing the inflation gap. Question marks have also been raised over the ECB’s ability to sustain whatever policy is announced on Thursday, as a fleeting period of QE could have a negligible impact on the eurozone.
Draghi departs from his role as ECB President at the end of October – there is a sense that he feels that this meeting in September could determine the final shape of his legacy.