Mario Draghi hasn’t moved any closer to full-blown quantitative easing.
Focusing on plans to buy private debt as soon as this month to buoy the weakest euro-area inflation in five years, the European Central Bank president yesterday left the option of purchasing government bonds in his toolbox. He also backpedaled on indications that he could boost the central bank’s balance sheet by as much as 1 trillion euros ($1.3 trillion).
Draghi’s reluctance to spell out how many assets officials might buy disappointed investors pushing him to go all-in. With the outlook for consumer prices worsening and the 18-nation economy closer to renewed recession, they’re pressuring him to honor his pledge to take further action if needed.
“For a dove, that was hawkish,” said Lars Peter Lilleore, chief analyst at Nordea Markets in Copenhagen. “The herd of market participants pining for QE will have to wait a bit longer.”
The ECB will start buying covered bonds this month and asset-based securities this quarter and continue for at least two years, Draghi said yesterday after the 24-member Governing Council met in Naples, Italy.
He also reiterated that he wants to “steer” the ECB’s assets toward early-2012 levels, when they were at more than 3 trillion euros, compared with 2 trillion euros currently. Yet he also said investors shouldn’t place too much emphasis on the precise size of the balance sheet.
“Draghi seemed to back away from his previous commitment to expand the ECB’s balance sheet back to 2012 levels,” said Marchel Alexandrovich, an economist at Jefferies International Ltd. in London. “What the markets were hoping for were some ballpark figures for what the ECB was likely to achieve.”
Spanish and Italian bonds dropped and the euro rose as the lack of a target conflicted with Draghi’s claim that policy makers are taking greater control over the level of stimulus they inject.
“The door to quantitative easing didn’t widen or narrow,” said Hetal Mehta, a London-based economist at Legal & General Investment Management, which oversees 450 billion pounds ($726 billion). “The ECB is very much in a wait-and-see mode.”
The refusal to lock in a number may reflect division among policy makers or a suspicion that a lack of available assets limits any swelling of stimulus, said Azad Zangana, European economist at Schroder Investment Management Ltd. in London.
“Investors had hoped that the ECB would step up,” he said. “The problem the ECB faces is that the pool of assets being targeted is too small to make a major impact on the economy.”
Austrian Governing Council member Ewald Nowotny opposed yesterday’s decision on concern over the risks it adds to national central-bank balance sheets, according to euro-zone officials who asked not to be identified because the discussion was confidential. Bundesbank President Jens Weidmann opposed the whole package, including the ABS program, at the September meeting, officials said last month.
Greek bonds rose immediately after the ECB said it may buy assets in crisis-hit Greece and Cyprus, which have a debt rating below BBB minus. Caveats will be included so that purchases will be equivalent in risk to assets bought elsewhere. Those conditions include keeping the countries in an aid program, a requirement that could thwart Greek plans for an early exit from its bailout.
Having already cut the ECB’s benchmark interest rate to a record low of 0.05 percent and offered cheap loans to banks, the Governing Council is still facing the threat of deflation in an economy that stalled in the second quarter and risks dropping into its third recession since 2008.
Inflation last month was 0.3 percent, compared with the ECB’s goal of just under 2 percent, and the central bank’s preferred measure of medium-term inflation expectations has continued to decline. Euro-zone factories cut prices in September by the most in more than a year, and manufacturing shrank in Germany, the region’s lynchpin.
“The economy is still fundamentally weak,” Draghi said. “The recent weakening in the euro area’s growth momentum, alongside with heightened geopolitical risks, could dampen confidence and, in particular, private investment.”
Euro-area policy makers are under growing pressure from foreign counterparts to rev up their economy and Draghi may face fresh calls to do so when he heads to Washington next week as the International Monetary Fund holds its annual meeting.
With the U.S. economy strengthening and the Federal Reserve poised to end its own QE program, White House economic adviser Jeffrey Zients this week identified Europe as the U.S.’s “number one area” of economic concern and said both its “monetary and fiscal policy are too tight.”
Draghi rebutted criticism that the ECB hasn’t done enough to aid its economy and again urged governments to revamp their economies to make them more productive.
“I find this description of the ECB as the guilty actor here needs to be corrected,” he said. “Other policy areas need to contribute decisively.”
Even so, he promised further action if needed, and signaled he won’t wait forever to make his mind up.
“We are going to gear our action according to how the medium-term outlook of our inflation expectations will develop in the coming months,” he told reporters. “Not coming years. Coming months.”