Mario Draghi, president of the European Central Bank (ECB).
By how much will the ECB expand its balance sheet?
The ECB bought 4.8 billion euros ($6 billion) of covered bonds in the first two weeks of a purchase program that’s set to broaden this month to include asset-backed securities. Analysts from JPMorgan Chase & Co. to Royal Bank of Scotland Plc are skeptical that the purchases, together with long-term loan offers, will be enough to meet Draghi’s proclaimed goal of steering the bank’s balance sheet toward the size it had in early 2012, adding as much as 1 trillion euros.
Coupled with a flagging euro-area economy and increased monetary stimulus from the Bank of Japan, that has put pressure on policy makers to do more. More than
half of the economists surveyed by Bloomberg News predict the ECB will eventually embark on large-scale sovereign-bond purchases.
So is more stimulus on the way?
Probably not today. Analysts predict interest rates will remain unchanged at their record lows, and hardly anyone sees policy makers agreeing on new non-standard tools as they observe how and if the money injected through asset purchases and long-term loans, or TLTROs, funnels through to companies and households.
Come December, things may change. The ECB has pinned its expectations to a large TLTRO take-up next month. With control over the size of stimulus from that measure in the hands of banks and Draghi vowing to take a more active approach in expanding the ECB’s balance sheet, broadening asset purchases to include corporate and sovereign bonds may become an option. This would be controversial, and not just because of probable challenges to the legality of such a move under EU law.
Is there a rift in the Governing Council?
Bundesbank President Jens Weidmann has publicly opposed most of the ECB’s latest moves and found support last month from colleagues including Banque de France Governor Christian Noyer. While recent decisions at the Federal Reserve, the Bank of England and the Japanese central bank have also been all but unanimous, the discord at the ECB is more heated and risks escalating if the prospect of quantitative easing were to become more concrete.
Draghi will probably also face questions about his style of leadership criticized in a Reuters report this week, and the lack of consultation with national governors.
What is the outlook for inflation in the euro area?
Euro-area inflation, which the ECB aims to keep just under 2 percent, picked up to 0.4 percent in October from the lowest level in almost five years. While that’s good news on the surface, the increase was mostly due to a sharp drop in the rate last year. Core inflation fell to 0.7 percent last month.
The European Commission cut its inflation forecasts for the euro area this week, saying prices will rise 0.5 percent this year and 0.8 percent in 2015. The ECB, which will update its own projections in December, currently sees price growth of 1.1 percent next year.
What’s next for Europe’s banks?
The ECB became the euro area’s banking supervisor on Nov. 4 after failing 25 banks at the end of a yearlong review of balance sheets. While some institutions still have to plug the capital holes uncovered during the exercise, Draghi will probably reiterate that the banking sector is now better placed to provide credit and support the region’s recovery.
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