Date: 15 Jan 2015, Economics and Finance
Question setter: John Karslake

ECB Quantitative Easing

Will the ECB announce that it is going beyond its existing stimulus measures and will start buying sovereign bonds in a programme of quantitative easing, at its meeting on 22nd January 2015?


Answer: Yes
Confidence level: 95%
Mean confidence level (all requests): 77.75%

Mario Draghi, president of the ECB has wanted to implement QE for a while but would not do so without a consensus. German opposition, from Weidmann particularly, has not allowed the unanimity required. The market has now been steered to expect an announcement on 22nd, so we have to believe that the entire council has agreed. The potential for dangerous volatility in the market has been shown by oil, metals and the Swiss Franc. The damage from shattering the market's expectations on QE cannot be worth risking for the ECB. It may still cause ructions if the proposed programme is too small. It is not to say that there are easy decision on how to carry out sovereign bond buying with the mix of strong and weak nations or how you deal with possible repudiation of debt by Greece. The best solution would be to announce a massive programme but flexibility on timing. Markets can be reassured by the firepower but the ECB may be able to delay certain types of purchase until the political scene becomes clearer. Appearing huge and inclusive, while retaining the possibility to exclude, or minimise purchases from, some countries, might retain enough speculation to lend some success. After all, the point is to recreate growth, raise inflation expectations and see employment improve.

Outcome: Yes
Score: 95
Mean score (all respondents): 77.75

Expert opinion:

Answer: Yes

Selected Expert Answer from Mettletest Panel:
The ECB has to act now. Draghi has prepared the markets and most members of his ECB council have taken the same line. The decision of the Swiss to remove their currency cap indicates they know Eurozone QE is coming. It would create a market shock if no clear intention is announced on the 22nd Jan. Inflation, growth and employment low - the position is probably dire enough to bring on board the German opponents of bond buying and Draghi will want unanimity in the ECB council if he is to announce a programme that will convince the markets. There is keen interest to see how the scheme will work. Will the ECB buy bonds of all 19 nations in the Eurozone and, if so, in what proportions? Will it effectively bail out peripheral nations, including rebellious Greece, by passing risk to the stronger core? This will be fiercely contested. Both supporters of the Euro and sceptics fear QE is coming too late to restore confidence and growth. The weak members of the zone need the support most but that disadvantages the strong, especially Germany. Moreover, there is the issue of the supply of sovereign bonds in the market. If sufficient purchases are to be made high risk countries must be included. The ECB must hope, as in the past, that its potential powers are as influential as its actions.

Answer: Yes

Selected Expert Answer from John Karslake:
The ECB has little else in its armoury and will announce QE on 22nd Jan. It has been well flagged by its president Draghi and many members of his council. Objections from the German contingent will probably be overcome by recent legal opinion supporting bond buying and respect for the mandate of the ECB regarding inflation and economic health . High unemployment, recession risk and deflation all need tackling urgently.
Nay-sayers claim that deflation, partly a shot-term (beneficial) effect of oil price falls, is being exaggerated in a ploy to bail out profligate, weak members of the Eurozone at the expense of the prudent. Market expectations, shown in inflation swaps, belie this view and the effect of these low expectations on growth worries the ECB. So, the real question is not if but how the ECB will introduce QE – an announcement to cheer markets but no immediate details? Will sovereign bond purchases include weak states, even Greece, which threatens default if Syriza wins the election? My prediction is that the given intent will be to buy bonds from all 19 nations but it will be conducted on a flexible monthly basis, allowing Greece, Portugal etc. to be excluded later, if need be. This could spike objections that strong nations would take the risk for the weak.

Outcome: Yes

Comment on outcome from Mettletest Panellist:
The ECB announced a programme of quantitative easing larger than most in the market had expected, at €1.1trn. Beginning in March, the central bank will purchase assets worth €60bn per month and continue till September 2016 or until there is a "sustained adjustment" in inflation (closer to 2%). Investment grade sovereign debt, asset-backed securities and covered bonds, but not corporate bonds, will be included in the purchases. There will be risk sharing on only 20% of the assets, the rest being borne by national central banks.The ECB will not buy more than a third of any country's debt issuance.
Initial reactions from investors were favourable with bond and equity markets rising on the news. Supporters of the scheme feel that its size lends it credibility.
There are many sceptics, who do not believe that this QE will result in growth. There is anger from the Germans who dislike adopting the risk for weaker nations and fear that these countries will now be less pressured to see through structural economic reforms.

The situation for Greece, with elections imminent, will now be back in the spotlight. The QE rules, prohibiting holdings over a third of any country's debt, exclude Greece until July, when a repayment deadline falls. Greece must also complete the stalled review of its current bailout with the "Troika" of the European Commission, IMF and ECB, as purchases from programme countries will be suspended during such assessments. If Syriza win the election, on a pledge to renegotiate Greek debts, how will that all play out?