The European Central Bank will have to extend its bond-buying programme to include eurozone government bonds – most likely by the start of next year -Barclays analysts argue.
Speculation that the ECB will follow other major central banks in starting a full “quantitative easing” programme has been stewing for some time, but was brought to a boil by the disappointing demand for its latest round of cheap bank loans this week.
ECB president Mario Draghi has said he wants to boost the central bank’s balance sheet by €1tn up to its 2012 size, but to do so he will have to buy government bonds, Barclays argued in a report today. The reasons are as follows.
First, increasing the ECB’s balance sheet by up to €1tn to its 2012 size is unlikely to be achieved via TLTROs, ABS and covered bond purchases alone…
Second, we believe that the risk of too long a period of low inflation is higher than the ECB’s inflation projections imply, while the growth outlook has significantly deteriorated and remains subject mainly to downside risks, especially for France and Italy.
However, the bank’s analysts admit that their prediction for QE in the first quarter of 2015 is a “close call”, especially given intense German opposition.
The charts below illustrate Barclays’ reasoning. The first one shows how eurozone inflation is expected to remain well below the ECB’s target for an extended time. The second shows how the size of its balance sheet relative to the common currency area’s economy has dropped significantly since the crisis.
The third illustrates how it is hard to lift the ECB’s balance sheet by €1tn without buying government bonds, given the paucity of alternatives.