ECB and QE?
Consensus is that the ECB will leave the benchmark interest rate unchanged at 0.25%, but the market players expect something dovish from Mario Draghi. It seems that November cut of the refi rate didn’t help much: the euro zone’s inflation slowed down in January.
The ECB has a number of options (BMO did a good job outlining them). The most talk now is about the possibility of the central bank’s stopping absorption of liquidity from bond purchases made during the financial crisis. Every week the regulator conducts operations to soak up liquidity created through the purchase of government bonds since 2010 within the Securities Markets Program. According to NAB, this would be the same as QE.
There was a rumor last week that German Bundesbank would support such step. The euro zone’s deflation risks may be more serious than the ECB’s trying to present. Actually the central bank can’t be sure that inflation expectations are “firmly anchored” as long as the pace of consumer prices growth is so low. As a result, the idea of suspension of the SMP sterilization looks quite reasonable. According to Credit Suisse, such move would automatically increase bank reserves by 175.5B euro, resulting in a quick and a relatively large monetary easing action.