LGIM’s Ben Bennett: The clock is ticking for ECB on QE

Ahead of tomorrow’s interest rate announcement from the ECB, Ben Bennett, credit strategist at Legal & General Investment Management comments on how close it is to embarking on quantitative easing.

The credit market is gripped by the prospect of explicit bond buying from the European Central Bank. The ECB is unlikely to announce QE tomorrow because the meeting comes so close to the European Parliamentary elections. June seems more likely, but the ECB is not finding it easy to agree on a QE programme and may need longer still.

It’s been a case of lots of words but little action so far. Press conferences and speeches from Draghi and his fellow decision makers have tended to provide a lot of verbal support. So far, the market has been happy to go along with promises.

Ultimately with each month that passes without a concrete announcement, the concern over whether the ECB can agree on an effective QE programme becomes stronger.

The clock is ticking, and a few European economies are already experiencing deflation. The aggregate inflation level for Europe is only one external shock away from joining them.

If inflation surprises to the downside once again or the euro rapidly appreciates, the ECB may be compelled to act sooner.

The continent’s core problems still need to be dealt with though. The world is suffering from a significant debt overhang, built up over many years prior to the start of the financial crisis, and the crisis has simply shifted the debt burden from private to public hands in much of the developed world, and created new debt mountains particularly evident in emerging markets.

In such an over-indebted world, attempts to stimulate economic activity by printing money will prove unsuccessful.”

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