The much-awaited expansion of the European Central Bank’s asset-buying, or quantitative easing (QE), program will be larger-scale than expected, according to Royal Bank of Scotland, which says the objective now is to head off mounting deflationary pressures in the euro zone.
RBS, in a research paper published this week, says the ECB will expand its balance sheet from €2.2 trillion ($3.2 trillion) now to €4.5 trillion, and not the €3.1 trillion previously envisaged. This suggests a further €2.3 trillion of bond purchases, which is more than twice the amount so far mentioned by ECB officials.
The ECB has already engaged in small-scale QE in recent years, offering a series of low-interest refinancing operations to lenders and buying repackaged mortgages and other bank debt in a bid to stimulate lending and anchor interest rates for small business and households. It has also set negative deposit rates to discourage banks from parking funds with the ECB.
However, stubbornly low growth rates and negative inflation across the euro zone have raised the spectre of deflation, a potentially destructive force if it encourages consumers to stop spending and business to hold off on investments.
Deflation also drives up the relative cost of debt.
RBS says the ECB will announce its expanded QE scheme at next Thursday’s monetary policy meeting of the governing council in Frankfurt.
Most of the new money be allocated to government bonds, which have hitherto been excluded from QE because of opposition from groups in Germany, which have challenged the ECB’s so-called Outright Market Transaction program in the European Court of Justice.
Sentiment, however, is changing, after the success of the US Federal Reserve’s massive QE program and the impact of lower oil prices on European inflation.
Full article: Bigger ECB asset-buying expansion planned (The Sydney Morning Herald)