Ready to strike: Is the ECB prepping to launch QE to fight deflation?

Is the European Central Bank prepping itself to ease monetary policy further?

In the past, some ECB officials have hinted at the possibility, but so far, the bank has refrained from easing further after it cut its benchmark policy rate, the refi rate, to 0.25% late last year.

Indeed, the ECB seemed to be on a mission to beat down expectations of any further easing, with ECB President Mario Draghi insisting the eurozone was recovering modestly and didn’t require any emergency measures.

That, despite the fact the 18-member currency bloc is inching dangerously towards deflation (a phenomenon of falling prices), according to many experts.

The benchmark inflation rate – the harmonised consumer price index – rose by a mere 0.7% in January, less than half of the medium term inflation rate targeted by the ECB.

But now, chatter is building up about the possibility of ECB finally taking steps to prevent the currency bloc from tipping into deflation.

Earlier this week, an ECB governing council member, Eriki Liikanen, said that a negative deposit rate, additional loans to banks and that very controversial tool – quantitative easing – were measures available to tackle deflation, according to a Wall Street Journal report. Liikanen is also the Bank of Finland’s governor.

Another governing council member, Slovakian central bank governor Jozef Makuch, also said that QE was an option, according to the report. But the biggest surprise was that the very hawkish Jens Weidmann, Bundesbank President, also threw his weight behind the idea of large-scale asset purchases, or QE, by saying that it is a possibility.

If Germany, which has been the most resistant to further easing measures, is really thawing towards the idea of a QE in some form, that’s a game changer. And the recent jawboning does seem to be suggesting a softening of Germany’s stance.

Adding to the pressure for easier monetary policy is the strength of the euro, which is hitting exports and further dampening economic activity. All these comments suggest that maybe, just maybe, the ECB is be getting ready to take some long-awaited action.

A real QE might still be some time away, but bank officials might coalesce around the idea of a negative deposit rate.

At least they’ll be doing something. Sure beats doing nothing at all.

[Image Credit]

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