ECB Moving Closer To Unconventional Policy
Sober Look | Apr 17, 2014 01:10AM ET
The ECB received another set of disappointing inflation reports today. For some time now the central bank has been betting on the fact the declining inflation figures were driven by food and energy, while the core CPI rate was recovering. Well, that didn't turn out to be the case, at least for now.
| Eurozone core CPI (source: Investing.com) |
With the euro remaining at lofty levels, the ECB is beginning to prepare the markets for new monetary stimulus, as the various officials discuss "unconventional" policy.
Weidmann:
Source: DB
It seems the ECB wants to stay away from simply buying sovereign debt, particularly of periphery governments (for obvious reasons). Buying only the core states' bonds on the other hand could be even more problematic. Moreover, lowering government bond yields is unlikely to stimulate private credit growth (after all it hasn't thus far). The central may also stay away from uncovered bank bonds for the same reasons it wants to avoid periphery sovereign paper. This leaves corporate paper - bonds and even direct loans to companies bought in the secondary market. Hard to imagine a central bank buying corporate paper, but it has been done in Japan, so why not in the Eurozone?Deutsche Bank has compiled an excellent chart of the ECB's options based on the effectiveness of the purchases in stimulating growth (getting capital to where it is most needed) vs. the size of the QE program. The tricky part is that the more effective the monetary transmission, the riskier are the assets.
These are some difficult choices for the ECB and the central bank may want to wait longer to see if the inflation picture improves and/or the euro declines. It may however end up being a long wait.
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