Barclays economists just made their prediction: the European Central Bank is going to start a full quantitative easing programme by the beginning of next year, with its other efforts to boost Eurozone demand falling flat.
The Fed and Bank of England kicked off their QE programmes in the immediate aftermath of the financial crisis, but the ECB has been held back. QE just means that the central bank is buying a bloc of financial assets, and that bloc is usually the bonds issued by that country’s government.
The ECB’s new bank credit wheeze has been a big flop so far, and pretty much everyone is now sceptical that it will have a major effect.
Mario Draghi’s goal is to bring the ECB’s shrinking balance sheet back to €3 trillion, from about €2 trillion now. The balance sheet grows by buying assets or offering banks credit, in an attempt to keep markets liquid and stop them from seizing up. There’s a good explanation here from Germany’s Bundesbank.
Barclays reckon this basically isn’t possible from what the ECB is doing so far. They think the TLTRO (targeted long term refinancing operation) scheme that disappointed everyone this week will only raise the sheet by €170 billion this year. It’s just not enough.
In comparison, there’s a massive market in central government debt that the ECB could dive into.
So far the ECB’s programmes are working with the asset-backed securities (ABS) and covered bond markets, while the market in government bonds is more than three times larger than either.
Earlier this year, lots of banks like BNP Paribas said they expected a QE programme over the summer, and then changed their minds.
But since the summer, inflation has dropped even further. That’s the second reason Barclays’ researchers say that Mario Draghi will have to relent and go for QE.
Though Capital Economics agreed in a research note Thursday that the ECB would eventually resort to QE, their analysts remain pretty sceptical about how much good it will do. Analyst Michael Pearce said that “the scale of monetary easing is set to be much more timid” than the Bank of Japan’s effort.
“Co-ordinating policy between the 18 separate governments and central banks of the euro-zone will be a Sisyphean challenge, even for Super Mario.”