Tuesday 24 September 2019

QE or more QE? That is the question for the European Central Bank

European Central Bank
European Central Bank

Colm Kelpie

This is an important week for the Eurozone. The European Central Bank has reviewed the region's progress and found the recovery wanting. The ECB thinks its existing asset purchase programme has helped, so the prescription is likely to be more of the same medicine.

Economists expect an announcement of significantly more asset purchases on Thursday. The ECB has given its programme of asset purchases time to judge whether the degree of stimulus it provides is enough to bring inflation back to target.

Its own forecasts already show it is not. In September, CPI inflation was forecast to be 1.7pc in the final quarter of 2017, below target.

The case for more stimulus seems to rest on the big picture: a recovery that has been too slow. It does not appear to be a carefully calibrated response to weakening prospects in emerging-market economies. That points to a significant degree of stimulus rather than tinkering around the edges.

The final estimates of the euro area's composite PMI will also be published on Thursday, with the manufacturing number having come earlier in the week.

Most of Friday is likely to be spent reflecting on the big event the day before. ECB President Mario Draghi is also scheduled to speak in New York. Tomorrow, the Bank of England's Financial Policy Committee will publish its second Financial Stability Report of the year alongside the results of the 2015 bank stress test. While most banks appear to be in good health, it's possible that the results of the tests will spur the FPC to raise the counter-cyclical capital buffer.

That policy instrument is designed to force banks to "lean against the wind" - in other words, raise capital buffers in good times so that they can absorb losses and support the real economy in the face of shocks.

The Monetary Policy Committee will have a keen eye on the proceedings.

It's likely that the higher capital requirements will lead to banks raising borrowing costs for households and firms. That would represent a tightening of monetary conditions, with possible implications for the path of interest rates.

Irish Independent

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