ECB preview: Cracks around the edges

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Eric Lascelles, chief economist, RBC Global Asset Management comments on the expectations for the November meeting of the ECB Governing Council.

The ECB has been unusually active over the past several months, cutting rates on two occasions and announcing a grand plan to print almost 1 trillion euros for injection into the Eurozone credit market. This has all been welcome in the context of minimal economic growth paired with very low inflation.

However, cracks are appearing around the edges. ‎The uptake on liquidity injection programs has been underwhelming and there simply are not enough asset-backed securities and covered bonds to absorb the proposed scale of purchases. Meanwhile, lower oil prices has sent inflation expectations falling further.

All of this has led to a clamour in financial markets for the ECB to buy a broader set of assets, most popularly government bonds, though some also argue for corporate bonds. Japan has lately set the standard, expanding its quantitative easing in an aggressive fashion, and putting pressure on the Eurozone to follow suit or risk a stronger euro.

European action remains quite possible, but seems unlikely to be announced at the upcoming meeting. This is for several reasons. First, it is not entirely clear that the ECB can legally buy government bonds.

Second, the economy has not been all bad. Help should come from an improving credit impulse, a softening euro, low yields and lower oil prices. These collectively add around half a percentage point to the economic outlook over the next few years.

Third, it seems that ECB members are not entirely enamoured with Mario Draghi’s shoot-from-the-hip dovish approach. He will need more support from fellow members before delivering another major round of stimulus.

This leads to the expectation of a status quo outcome in terms of policy action, and a statement that may be disinclined to dwell excessively on recent weakness.”

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