Analysis: ECB may be nudging towards QE at last

The ECB is not ready yet for quantitative easing, but a sharp drop in the bank’s forecasts for inflation and growth brings such an intervention closer. Although divisons persist within the bank, the latest data points to an increasingly urgent threat of deflation.

ECB chief Mario Draghi said the bank will decide “early next year” whether further action is required. By his very words, however, he appeared to be nudging the bank further towards QE. Such scheme might do little enough on its own for the Irish economy but the objective would to be support the wider single currency area, whose very weakness is a source of considerable risk to Ireland’s recovery.

Euro zone inflation dipped to 0.3 per cent last month, far below the official target of below but close to 2 per cent. The bank now forecasts inflation at 0.5 per cent for 2014 and 0.7 per cent in 2015, well off a September forecast of 1.1 per cent for 2015. As Draghi made clear, the latest forecasts do not fully account for the falling oil prices.

Economic growth

The outlook for economic growth hardly better. The latest ECB research points to 1 per cent euro zone growth in 2015, down appreciably from 1.6 per cent in September. After years of fiscal retrenchment and a prolonged sense of crisis, this is not the stuff of consumer confidence on the streets of Europe.

Making matters worse is the fact that all this follows ECB moves to cut interest rates to a record low, the introducion of special measures to boost bank lending and programmes to buy up asset-backed securities and covered bonds. Add to that the oil price decline and contentious ongoing campaigns to boost prices and growth do not smack as as overwhelming successes.

The contrary is the case, although the ECB is not the only actor in this drama. There is no end of frustration in European circles at Germany’s failure to do more to stimulate its economy and that of the wider euro zone.

So why won’t the ECB follow the Federal Reserve and the Bank of England down the road of QE? After all, Draghi made it clear today that he believes buying up sovereign bonds has been proven to work and said the such action would come within the ECB mandate. But the ECB’s top echelon is divided. While Draghi would appear to be waiting for recalcitrant German members of the ECB board to drop their resistance, he made clear that unanimity would not be required to proceed with bond-buying.

The conclusion must be that time is running out .