Slowing inflation paves way for more ECB action

Slowing eurozone inflation is likely to make the European Central Bank increasingly nervous and pave the way for further monetary easing, analysts say.
But the ECB looks unlikely to fire the latest weapon in its anti-deflation armoury as early as this coming week when it holds its last monthly policy meeting of the year.
According to official data last week, inflation in the 18 countries that share the euro slowed to 0.3 percent in November from 0.4 percent the previous month, feeding fears of imminent deflation.
Falling prices may sound good for the consumer, but they can trigger a vicious spiral where businesses and households delay purchases, throttling demand and causing companies to lay off workers.
"What pleases consumers makes the ECB increasingly nervous," said Commerzbank economist Christoph Weil.
The central bank is scheduled to publish its latest updated inflation and growth forecasts on Thursday and it is worried that medium-term inflation expectations could become permanently de-anchored from the ECB's target of around 2.0 percent.
Given that the ECB has already launched a multi-pronged offensive against deflation, obtaining that objective could require more radical action, according to analysts.
The ECB has so far cut its interest rates to new all-time lows, made unprecedented amounts of cheap loans available to banks via its LTRO and TLTRO programmes, and unveiled asset purchase programmes (ABSs and covered bonds) to pump liquidity into the financial system.
But it has so far shied away from a controversial policy of quantitative easing (QE) that other central banks around the world have embarked upon in order to stimulate their economies.
- 'Matter of time' -
QE is the large-scale purchase of government bonds and such a policy has many critics in Europe, not least the German central bank or Bundesbank, because it is felt that it takes the ECB outside its remit and is effectively a licence to print money to get governments out of debt.
"Broad-based bond purchases by the ECB now seem to be only a matter of time," said Commerzbank economist Weil.
Such expectations appeared to be confirmed last week when the ECB's number two, Vitor Constancio, said the central bank would only be in a position to gauge whether the previous stimulus measures are working in the first quarter of 2015.
"If not, we will have to consider buying other assets, including sovereign bonds in the secondary market," Constancio said.
Just days prior to that, ECB chief Mario Draghi had vowed to "step up the pressure and broaden even more the channels through which we intervene... without any undue delay."
But ECB-watchers are sceptical that QE will be announced as soon as Thursday.
"The ECB will meaningfully revise downwards its growth and inflation projections on Thursday. Given the already low starting point, this would strengthen the case for further stimulus," said UniCredit economist Marco Valli.
"We expect Draghi to signal that a new dose of monetary easing is in the pipeline."
- 'When and how big?' -
But the exact timing for action is "a close call", Valli said.
"On the one hand, the ECB does not have any real incentive to delay a move that appears warranted by economic fundamentals. On the other hand, some governing council members seem to prefer to wait... before considering new stimulus measures."
Jonathan Loynes at Capital Economics agreed.
"It seems clear that the ECB will soon embark on a full-blown quantitative easing programme incorporating sovereign debt purchases," he said.
"The key questions now are when and how big? While we think that the contingencies for QE set out by president Draghi have already been met, governing council members may want more time to assess their existing policies."
Commerzbank economist Michael Schubert said he did not expect QE to be approved until one of the first three meetings in 2015.
"Only then will the ECB be able to assess the impact of the measures taken so far," he said.