ECB signals return of bond buying

Comment by Paul Diggle from Aberdeen Standard Investments

Mario Draghi sent an equivocal signal today in his Sintra speech that the ECB intends to renew easing monetary policy. He made it clear that additional stimulus will be required if economic conditions don’t improve, that the ECB has the tools for the job and will consider what steps are necessary in the coming weeks.

His comments build on the tone of what the ECB has been communicating lately, emphasising that the central bank still has the firepower it needs and is remaining mindful of economic activity data that has not stopped deteriorating.

Draghi has not yet gone as far as saying what form any renewed easing might take, but any genuine effort will have to utilise two tools:

Restarting QE – At this stage this is probably the ECB’s preferred method of showing it is willing to do something bold. It is broadly accepted as an appropriate way of tackling persistently disappointing inflation and was arguably wound up prematurely at the end of 2018. There are constraints on the bond buying programme but these are self-imposed. There’s nothing stopping the ECB from changing them as long as the political argument can be won amongst European countries.

Cut the deposit rate – Seems to be the ECB’s least preferred tool at this stage, with the deposit rate already at -0.4%. But recent ECB research has suggested that they do think further cuts would help stimulate the economy and that concerns in some quarters about the impact of more negative rates on the banks can be assuaged. In an environment where the Fed is cutting rates, the ECB can probably afford to go to -0.6%.

It’s now all a question of when this happens - and the inference from Draghi’s speech is that it will be soon. The fact that he’s talking about “weeks” and not months suggests that the ECB could spend the July meeting talking about what form easing should take, and then announce it in September.

Europe never did get out of the economic doldrums in spite of all the of the ECB’s previous efforts. So it’s rational to ask whether this time will be any different. Probably not.