The ECB and QE, Will a Delay be in the Cards?

While it seem evident that the ECB is poised for a move towards full blown QE and sovereign bond purchases, there remain open questions on how the program will function. Reports this week suggest the central bank is mulling three options, and the decision is further complicated by the uncertainty about Greece’s status within the Eurozone. This is not an easy decision, and it is one that could well see the ECB delaying the implementation and announcement of final details until March, even if QE was to be agreed in principle at the January 22 meeting.

With headline inflation falling into negative territory at the end of last year for the first time since 2009, the ECB is readying for bond purchases and fully blown QE. This despite the fact that the drop in inflation was entirely due to lower oil prices, with prices excluding energy up 0.6% year over year and core inflation actually picking up to 0.8% year over year from 0.7% year over year in the previous month.

Unlike the last time headline inflation rates were below zero, the majority of ECB council members seem concerned that medium to long term inflation expectations are threatening to fall further. Core inflation is substantially below 2009 levels and while Bundesbank President Weidmann continues to oppose sovereign bond purchases, the debate now seems to be focusing on how, not if the ECB will implement its form of QE.

In any case, one way to dodge the issue, is to announce bond purchases on January 22, but with a later implementation date and details to be published at a later date in the hope that the future of Greece in the Eurozone will have become clearer by then. Indeed, with the current bailout program to finish at the end of February, a date in March may be possible option.

Will the ECB’s latest expansion of its monetary policy tools actually work? QE is likely to be limited. Government bond yields in countries such as Spain and Italy have already fallen sharply in anticipation of the central bank’s move and room for further spread narrowing is limited, especially if the central bank purchases government bonds in line with its capital key. The markets will have to wait and see.

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