ECB: Market expecting Draghi to up the QE ante come September - Rabobank

Research Team at Rabobank, suggests that should the weakness continue in Europe, calls for additional stimulus on the part of the ECB will only gain traction.

Key Quotes

“The market is already very much expecting ECB President Draghi to up the QE ante come September, when the ECB will have the latest economic and inflation projections to hand. The last meeting was somewhat of a non-event, though did provide some clues as regards the Governing council’s desire to adopt a ‘wait and see’ approach before expanding the programme yet again.

Our ECB watcher Elwin de Groot expects a further 10bps cut to the deposit rate combined with a possible extension of the programme beyond the end of March 2017. We view both of these measures as essentially ‘quick wins’ for the ECB in its efforts to further prime the ‘effectiveness’ of the QE programme.

In what can only be viewed as ‘feeble’, the euro area growth path is a significant uphill battle for the ECB and to our mind, looks to becoming increasingly so. The growth rate booked over the quarter was in part weighed down by weak demand for euro zone exports from large developing countries that are themselves struggling to revive their own growth.

President Draghi has made no secret of his views as regards what must be done. He has also made no secret of the fact that policy makers can only do part of the heavy lifting and that it is up to governments to not only adopt painful (politically painful) structural reforms to free up labour flexibility and productivity which can in turn help boost inflation growth. Mr Draghi has also highlighted the need for greater fiscal efforts in terms of investment-for-growth. Borrowing from one of our perspicacious clients, we have suggested before that there is little to be gained from buying VW bonds, why not buy VW’s themselves. This will assist in investment, spending and growth. Buying the auto manufacturer’s bonds merely inflates their financial value. Buying the cars creates jobs.

Though this example is a touch extreme given the practical implications of ‘buying VW’s’, to put it very simply, having purchased almost EUR1 trillion in assets under the asset purchase programme, the ECB remains as far away from meeting its inflation target of just under 2.0% as it did in June 2014 when it launched the first in a series of stimulus packages. On Friday, Eurostat data confirmed the reality facing the ECB, announcing that consumer prices in July were just 0.2% higher than in the same month last year, a slight pickup from the 0.1% rate of inflation recorded in June. Perhaps the answer lies farther afield?”