ECB could return to stimulating eurozone economy, but only if Bundesbanker fails to get top job at central bank

ECB could return to stimulating eurozone economy, but only if Bundesbanker fails to get top job at central bank
Bundesbank chief Jens Weidmann

The ECB could return to its major programme of buying bonds next year, possibly meaning interest rates would stay low for much longer, but only if Bundesbank chief Jens Weidmann doesn’t get his hands on the top job at the central bank.

That’s the view of Capital Economics which believes the ECB could resume its so-called quantitative easing (QE) programme of stimulating the eurozone economy because of modest growth and flagging inflation.

The economics firm said that much will depend on who will take over from Mario Draghi as head of the ECB later this year, but it believes all bets are off for a new QE programme next year if hardliner Mr Jens were to secure the post.

It comes ahead of the ECB meeting next week when it will “probably” say it will leave official interest rates unchanged to at least next summer and announce the cost of the third round of its cheap loans for banks.

We think the ECB will not make any major changes to its macroeconomic projections next week. This would leave its forecasts for GDP growth at 1.1% for this year and 1.6% for next year, and its inflation forecast rising to only 1.6% by 2021.

“Instead, we think the bank is more likely to revisit its asset purchase programme if it needs to provide additional stimulus. Even within its own self-imposed limits, it could buy a further €1 trillion of assets, enough for nearly three years of QE at a decent pace of around €30bn per month,” Capital Economics said.

However, longer term, the economists predict that the outlook for German economy is less rosy, while “news about inflation has been no more encouraging” in the eurozone.

“Nobody knows how the horse-trading over top European jobs will end,” said the economics firm on the choice of new boss at the ECB.

“But our best guess is that Jens Weidmann, the president of the Bundesbank, will not get the ECB job regardless of the outcome of the negotiation over who becomes the next president of the European Commission,” it said.

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