Mario Draghi has two weeks left to decide how to ramp up stimulus in a way that doesn’t upset either his colleagues or investors.
When ECB policy makers meet in Frankfurt from March 9-10, they’ll consider whether negative interest rates and €60bn a month of debt purchases is enough to revive consumer prices. With another rate cut priced in by markets, the biggest question mark hangs over how to customise quantitative easing.
The ECB president has said there are no limits to how far policy makers will go within their mandate, yet sub-zero rates carry risks and expanding QE is easier said than done.
“It’ll be very challenging” to increase QE, said James Nixon, an economist at Oxford Economics, who doesn’t expect such a move just yet. Here are the main options and obstacles.
- Cut the deposit rate: A cut of at least 10 basis points from the current minus 0.3 percent is wholly expected by investors. Decouple From the Deposit Rate: The ECB could allow purchases of debt even when the yield is lower than the deposit rate. That’s something the hawks may be able to live with.
- Deploying more QE: About two-thirds of QE purchases are government and agency debt, with covered bonds and a small proportion of asset-backed securities making up the rest. The Governing Council agreed in December to make regional and local government debt eligible. The country to watch is Germany. As purchases are effectively linked to the size of the economy, it makes up almost a quarter of QE. Yet of the 51 securities in the Bloomberg Germany Sovereign Bond Index, only 15 meet the rules on yield and maturity.
- Scrap the Capital Key: To ease reliance on German debt, the ECB could eliminate the capital key linking buying to economic size. That strategy might draw accusations of monetary financing, banned byEU law.
- Buy Other Assets: The ECB might expand the asset classes eligible for QE, perhaps adding corporate bonds. The concern is there may not be enough company debt available.
- Lift the Issue Limit: In September, the ECB lifted the ceiling on the share of each bond issue banks can buy. It can do so again, but would probably limit itself to certain securities.