Cash boost sought as deflation at ECB’s door

FRANKFURT - Agence France-Presse

Analysts said they were convinced that the ECB is now planning QE after its president Mario Draghi said recently that the bank is becoming concerned about falling inflation expectations.

Financial markets are looking to the European Central Bank (ECB) to open the cash floodgates this week after consumer price data showed the 18-country eurozone is flirting with deflation, analysts said.

Speculation is rising that the ECB's decision-making governing council could signal plans for what is known as “quantitative easing” or “QE” at its regular monthly meeting on Sept. 4.

This is a radical policy, already used by other central banks such as the U.S. Federal Reserve, of buying securities on a big scale to inject cash into the economy.

The ECB has already cut its key interest rates to record lows and made huge volumes of ultra-cheap
cash available to banks in a bid to kick-start lending in the singe currency area. But the pressure has increased on the ECB to take still more measures after eurozone inflation slowed to a paltry 0.3 percent in August from 0.4 percent the previous month.

That is worryingly below the central bank's target of just under 2.0 percent and brings the single currency area perilously close to deflation, a climate of falling prices which can cause businesses and consumers to delay purchases, further reducing demand and prices and pushing up unemployment.
Analysts said they were convinced that the ECB is now planning QE after its president Mario Draghi said recently that the bank is becoming concerned about falling inflation expectations.

The remarks sparked a rally on European financial markets early last week. “The ECB finally seems to be facing facts, with Draghi conceding... that the economy is too weak and that inflation expectations have dropped,” said Capital Economics economist Jennifer McKeown.  

ECB governing council member and Austrian central bank chief Ewald Nowotny said that he was "worried" about the outlook for eurozone growth, and that eurozone recovery was slower than the ECB had expected.

Deutsche Bank economists Mark Wall and Gilles Moec suggested that the ECB might even embark on private QE, in the form of asset-backed securities (ABS), as early as this week. Such a policy would greatly widen the range of paper assets which the central bank would buy from the balance sheets of financial companies, replacing them with ready cash. "What we expect is not generic QE with government bond purchases, as other central banks have done," they said.

"We believe the ECB will engage in private QE, that is ABS purchasing as a complement to the TLTRO" or liquidity program. ECB chief Draghi has repeatedly said preparations for such an ABS program are underway.