ECB Says Further Policy Measures to Come as Rates on Hold

By Alessandro Speciale and Jana Randow

Photographer: Tomohiro Ohsumi/Bloomberg

At about 2:30 p.m. in Frankfurt, Draghi will probably commit to a quantitative-easing... Read More

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The European Central Bank kept interest rates unchanged at record lows and said President Mario Draghi will announce further policy measures at a media briefing later.
The Governing Council left the main refinancing rate at 0.05 percent, a decision predicted by all 48 economists in a Bloomberg News survey. The deposit rate remained at minus 0.2 percent and the marginal lending rate at 0.3 percent.
At about 2:30 p.m. in Frankfurt, Draghi will probably commit to a quantitative-easing program that may exceed 1 trillion euros ($1.2 trillion). The ECB’s arrival at this point, three months after the Federal Reserve ended its own QE, marks a critical juncture in the history of the currency and the European unity it embodies.
“QE in Europe is like trying to push on a piece of string, there’s nothing to
push against,” Anne Richards, chief investment officer at Aberdeen Asset Management Plc, said at the World Economic Forum in Davos. “Until France and Italy, and to a lesser extent Germany, wake up to the fact that we’ve got to do something on the political front and got to really target structural reforms, we’ll be sitting here in 12 months’ time wondering why QE failed.”

ECB Rift

The euro fluctuated after the announcement and was up 0.2 percent at $1.1629 at 1:52 p.m. Frankfurt time. Spanish and Italian bonds pared their declines
The ECB’s Executive Board on Wednesday proposed spending 50 billion euros a month, primarily on sovereign debt, through the end of 2016, taking a total package to about 1.1 trillion euros, according to two euro-area central-bank officials.
QE has been long in the making. The ECB took a step in that direction in 2010 when it bought the bonds of debt-strapped countries such as Greece. That was opposed by then-Bundesbank President Axel Weber within hours of the announcement, opening a rift between the ECB and the German central bank whose uncompromising stance on inflation inspired its design.
The rift became a schism. In recent weeks, current Bundesbank President Jens Weidmann and his former deputy Sabine Lautenschlaeger, now on the ECB’s Executive Board, have been the loudest voices against more stimulus. Their argument: The slump in oil prices that’s damping inflation will bolster the economy as previously announced measures begin to take effect.
Against that speak inflation expectations, which dipped below the ECB’s 2 percent price-stability threshold in August. Consumer prices are falling on an annual basis and may continue to decline for a substantial part of 2015, according to ECB Chief Economist Peter Praet. Compounding the problem for Draghi and the other 24 members of the Governing Council are subdued economic growth and near-record unemployment.

‘Not Warranted’

“I don’t doubt that the Bundesbank would have done sovereign QE if German inflation had been at zero or below,” said Guntram Wolff, director of the Bruegel research group in Brussels. “The real issue is that the ECB is going to buy government debt in a union of 19 countries with 19 different treasuries. At some point, there is the risk there will be some redistribution of wealth which is not warranted by the treaty.”
As governments haggle over political and budgetary sovereignty, the ECB’s challenge is to make any program effective for the entire currency region while not preempting steps toward more European unity that nations aren’t yet prepared to take.
“There is no political consensus among euro-zone member states to issue euro bonds,” said Andrew Bosomworth, Pacific Investment Management Co.’s head of portfolio management in Munich. “The ECB’s critics claim QE is tantamount to euro bonds via the back door by unelected officials, and therefore wrong.”

Divisive Issue

Politicians including Italian Prime Minister Matteo Renzi have signaled support for QE. They’re looking for benefits such as a further weakening in the euro and a drop in sovereign-bond yields closer to those of Germany, the only country in addition to Luxembourg to maintain a top credit grade at all three major rating companies through the crisis. That’s more likely if risk is shared across all euro-area nations, another divisive issue.
“If that’s the discussion -- that the ECB takes Europe forward and takes this big leap toward risk pooling, then we’d better not have it,” Executive Board member Benoit Coeure said in Dublin this week.
The issue of who will be liable for any risks from QE in a default highlights the gaps in euro-area unity. While member states usually share profits and losses relative to the size of their economies, officials have suggested that national central banks be made at least partly responsible for their own actions.
That would address legal concerns related to a prohibition on financing governments and mutualizing debt in European law. It would also allow any program to be bigger, while keeping up the incentive for governments to push through reforms. Yet it may not be enough to steer Europe away from crisis.
“I am all for European QE,” former U.S. Treasury Secretary Larry Summers said in Davos on Thursday. “The risks of doing too little far outweigh doing too much. That said, I think it’s a mistake to think that QE will be a panacea in Europe.”