The European Central Bank may be running out of road.
At the start of the year, the euro was plummeting and a fall in oil prices was supposed to give an additional boost to consumers in addition to its quantitative easing juicing the markets.
Now the euro is headed back up to where it was trading near the start of the year and inflation expectations are plummeting again, with the latest print showing the headline number unchanged at just 0.2% in August.
When asked by Reuters in a poll, last week, whether the ECB had any serious alternatives to its monthly purchases of mostly sovereign bonds if serious economic weakness were to reappear, the answer was a resounding “no” from 34 of 46 analysts.
“There is no viable alternative to QE available for the ECB. The only thing that is left is buying bonds directly,” said Michael Schubert, senior economist at Commerzbank.
With a negative deposit rate of 20 basis points and a refinancing rate of just 5 basis points, and €60bn of mostly sovereign bond purchases being conducted each month, the ECB is at the very least near its limit.
The bank’s policymakers, nonetheless, insist the ECB stands ready to take additional measures if needed.
But the 12 economists surveyed by Reuters who said the ECB has not run out of options had some vague and wide-ranging responses on what other policies it could pursue.
Some said the ECB could re-introduce “forward guidance”, and others said it could launch more targeted long-term refinancing operations (TLTROs).
Two economists said it could use the Outright Monetary Transactions programme (OMT).
But the OMT, announced three years ago after ECB president Mario Draghi famously promised to do “whatever it takes” to save the euro, hasn’t been used at all.
Some said the ECB could cut the refinancing rate, already at 0.05%, and lower an already negative deposit rate further.
But if it did try to cut a negative rate even more, there’s a good chance that might not be effective, if a separate Reuters poll this week of money market traders at ECB refinancing auctions is anything to go by.
Two forecasters said the ECB could buy equities, an idea that would be extremely controversial and difficult to implement. Other suggestions included a transfer of cash to businesses or households directly, so-called helicopter money.
But one respondent, noting that any alternatives would have a low impact, said it merely expects the ECB to use “verbal intervention” rather than actually taking such decisions.
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