Tomorrow, the European Central Bank (ECB) holds its monthly monetary policy meeting, arguably the most important one since the eurozone’s sovereign debt crisis came off the boil in 2012.
That’s because the ECB is about to decide whether to do quantitative easing (QE), a programme that involves buying up government (and maybe corporate) bonds. The object of the programme is to generate economic activity by nudging investors into other financial assets (like stocks) as government debt has an increasingly poor return.
That is happening because Europe’s inflation figures, which have been falling for years now, are finally in negative territory. The ECB is wary about the threats of deflation, and economic activity in the euro bloc generally sits somewhere between poor and non-existent. Unemployment is still extremely high, at 11.5%, and strays much higher in the southern, peripheral countries.
Currently, pretty much everything is suggesting that they will do QE. A slip-up by French President Francois Hollande in a speech on Monday seemed to confirm it, and investors are expecting a programme somewhere north of €500 billion ($US579.18 billion). That’s relatively small in comparison to US and UK QE programmes, and given the size of the European economy. Anything smaller than that will likely be seen as a disappointment.
But there are some hints that the programme could be bigger than analysts expect, which would be a positive surprise for markets tomorrow. A hint in that direction from ECB board member Benoit Coeure came early in January too.
Here’s a handy chart from Credit Agricole and what would constitute a surprise, both for good and bad reasons:
Here’s what some other major forecasters are expecting:
- Barclays: The ECB is likely to indicate a €500-750 billion programme tomorrow
- Morgan Stanley: €500 billion of government bonds and €100 billion of corporate bonds will be purchased
- Bank of America: €500 billion to €700 billion over 18 months
- Oxford Economics: A larger programme of more like €800 billion
- Societe Generale: €500 billion to €600 billion of sovereign bonds will be purchased
- Capital Economics: A €500 billion bond purchase programme
- Deutsche Bank: DB don’t give a clear forecast of what they think the programme will look like, but there are hints that it could be larger. Most importantly, Deutsche’s economists believe full QE will have to wait until the March meeting in six weeks.
The there’s the question of what to do about Greece. Greek government bonds have a junk status with several credit rating agencies, and reports around the ECB’s internal discussions suggest that only investment-grade bonds will be purchased.
Greece’s elections, which come only three days after the ECB meeting and are likely to result in a radical left-wing government, also complicate things. Other European countries will likely be unhappy if the ECB begins purchasing Greek debt, only for the government in Athens to demand another haircut (in which the value of Greek bonds held by the ECB would be slashed).
At 12:45 p.m. GMT (7:45 a.m. ET) the decisions are announced, and at 1:30 p.m. GMT (8:30 a.m. ET), ECB chief Mario Draghi will give a press conference.
Whatever happens, it’s going to be massive.