If at first you don’t succeed, extend, and then extend again.
With euro-area inflation stuck near zero for almost two years and Brexit now threatening to undercut the region’s recovery, economists see European Central Bank President Mario Draghi as highly likely to lengthen quantitative easing for a second time. That would take the asset-buying program beyond its current end-date of March 2017 and above the target of 1.7 trillion euros ($1.9 trillion).
More than 80 percent of economists in a Bloomberg survey expect such a decision, with a similar share predicting the ECB will tweak its purchasing rules to avoid running out of securities to buy. Almost half of respondents foresee action on Thursday, when the Governing Council sets policy in Frankfurt, with almost all the rest predicting an announcement at the October or December meetings.
Draghi’s position is reminiscent of the one Ben Bernanke faced in 2012 when the then-chair of the U.S. Federal Reserve added his third installment of asset purchases, so-called QE3, and promised to keep going as long as necessary. The ECB head has repeatedly said officials will keep up their stimulus until they see a sustained adjustment in the path of inflation, and the signs are that’ll take more than another six months.
“Conditions to withdraw monetary stimulus will likely not be met next March,” said Kristian Toedtmann, an economist at DekaBank in Frankfurt. “There is no point in postponing this decision.”
Inflation in the 19-nation euro area was 0.2 percent in August, unchanged from July, and core inflation weakened. Fresh ECB projections are scheduled to be released on Sept. 8., an event that has often underpinned a decision to change policy.
The more the ECB buys, the greater the risk that a scarcity of assets turns into a shortage. To avoid that, economists see it as almost inevitable that a QE extension would have to be accompanied by a change in the central bank’s self-imposed rules on purchases. That’s a potentially tricky debate in the Governing Council, which set the parameters to avoid concerns over market distortion, monetary financing and risk-sharing.
First among those tweaks would be to increase the maximum share of each bond issue that the ECB can buy, according to the survey. Second would be to drop the rule that assets are ineligible if they have a yield below the deposit rate, currently minus 0.4 percent. A minority says the central bank could move away from linking national QE allocations to the size of each economy, referred to as using the “capital key.”
“Removing the deposit-rate floor would be a powerful move and also politically less tricky than deviating from the capital key,” said Holger Sandte, chief European analyst at Nordea Markets in Copenhagen. “The ECB will have to change the QE parameters before long, but they will probably wait until December before taking some of the council members deeper into their discomfort zone.”
The great unknown in the ECB’s policy deliberations is the impact of the U.K.’s decision to leave the European Union. Despite grim predictions, there has so far been little observable negative impact on either the euro-area economy or Britain, its biggest trading partner.
The survey signals little in the way of revisions to the previous round of ECB economic projections, apart from the 2017 figure for gross domestic product growth. That estimate currently stands at 1.7 percent, and 37 of 50 economists said it would be cut.
The ECB’s current inflation forecast doesn’t see price growth returning to target before 2018. That means ending QE — economists expect a Fed-style tapering — is probably a long way off.
“My base case is that they will extend QE by six months in September,” said Claus Vistesen, chief euro-zone economist at Pantheon Macroeconomics Ltd. in Newcastle, England. “Anything else would be a disappointment, and likely cause a hiccup in markets.”