The current situation in the euro zone could feel like déjà-vu to Mario Draghi.
Inflation has reached zero once again, economists are worried about low growth, and problems in emerging markets threaten to create external risks. At the same time, the markets are hoping for a new cash infusion from the European Central Bank, the central bank that sets monetary policy for the 19-nation currency bloc.
All of this is heavily reminiscent of the situation in late 2014, when the ECB decided to embark on major bond purchases of more than €1 trillion.
Mr. Draghi, the central bank’s president, was under the same kind of pressure Thursday as the ECB’s Governing Council met in Malta, only this time the talk was of expanding the bond-buying program rather than launching it in the first place.
And yet, Mr. Draghi decided to hold back from taking any extra monetary policy actions — at least for now.
“There was a very rich discussion about all monetary policy instruments that might be used if warranted,” Mr. Draghi told reporters following the meeting. “No specific choice has been made yet.”
But something is clearly brewing. For analysts, Mr. Draghi’s comments made clear the ECB’s next rate-setting meeting in December could be the big one.
In the long term, many economists expect the ECB will indeed increase the volume of its bond purchases.
“The communication at the press conference was as dovish as it could have possibly been without announcing more policy easing at this meeting – message received and understood,” Ken Wattret, the London-based chief economist of BNP Paribas, said in an analyst note.
The euro dropped in value against the dollar by the most in nine months following Mr. Draghi’s comments, losing nearly 2 percent of its value and trading at 1.1128 on Thursday evening. While the U.S. Federal Reserve may yet decide to raise interest rates in December, it now appears the ECB will loosen monetary policy the same month.
There are some clear reasons for this. Indeed, the euro zone economy has gotten somewhat off track in the last few months. Inflation is a particular concern, prompting many central bankers to suggest the ECB needs to take extra steps down the line. Spanish Central Bank Governor Luis Maria Linde, ahead of Thursday’s meeting, described the 0.1 percent decline in the euro zone consumer price index in September as “worrisome” and talked about boosting ECB cash injections.
Economists, too, expect the ECB will have to act in the next few months, even if few had predicted the central bank would make a specific announcement on Thursday. “I do not expect the ECB to approve an expansion of the bond purchase program on Thursday,” Jörg Krämer, chief economist at Commerzbank, said ahead of the meeting.
Mr. Draghi stressed his readiness to take action to boost inflation, but stopped short of increasing the current volume of €60 billion, or $68 billion, of ECB asset purchases a month. For now, the ECB confined itself to words. But many economists, including Mr. Krämer, now expect it to announce measures to step up quantitative easing in December.
Mr. Draghi fueled those predictions with his comments on Thursday. The ECB president made clear that the lack of action was more about the central bank needing time to figure out its next move, rather than a sense that no fresh actions were needed to get the euro zone’s economy back on track.
“The overall assessment is that it was not a wait-and-see, it is a work-and-assess” approach, Mr. Draghi said. “The Governing Council is willing to act.”
Quantitative easing may not be the only tool up Mr. Draghi’s sleeve. The ECB president signaled that the central bank may also consider lowering its deposit rate – the interest rate it charges banks that park their reserves with the ECB. That rate is already in the negative, at -0.2 percent, but Mr. Draghi signaled he may be willing to cut it further in order to force banks to put the money to use.
The problem, and reason that nothing was announced on Thursday, is that the ECB has to look at its next move extremely carefully. Expanding the bond purchases, for example, could be read as a signal that the policy isn’t working, which could fuel even more uncertainty.
“If you speculate too early about doing more, it also weakens what you have already decided on,” Finnish ECB Council member Erkki Liikanen said recently in an interview with German financial newspaper Börsen-Zeitung.
Another problem is that there’s conflicting data. The ECB lending survey published Tuesday was surprisingly positive. In Italy, in particular, banks relaxed their standards for loans to businesses and households. This suggests a turnaround in lending.
On the other hand, inflation has moved further away from the ECB’s medium-term goal of just under 2 percent. And the outlook will become especially problematic if expectations also decline.
If businesses and consumers expect lower prices and incorporate these expectations into wage bargaining, this could lead to a self-fueling downward spiral. Inflation expectations, which are derived from market prices, were recently only slightly above the all-time low they hit in January.
For these reasons, economists see Mr. Draghi taking middle path for now. Carsten Brzeski, chief economist at ING-DiB, spoke of a “verbal intervention” that is typical of the ECB.
Mr. Draghi pointed out that the downside risks for the economy and inflation had increased, something that raises the prospect of the ECB stepping up its bond-buying program in future months.
Such comments alone could push down the euro in foreign exchange markets. After a long decline, it had appreciated against the dollar in recent months, weakening euro zone inflation even further. Mr. Draghi cited the appreciation of the euro currency as a concern for the central bank.
In the long term, many economists expect the ECB will indeed increase the volume of its bond purchases. It will probably do so in December, because some economic data will likely worsen by then, said Holger Schmieding, chief economist at Berenberg in London.
Jörg Krämer of Commerzbank also assumes that the ECB will increase the duration or the monthly volume of the bond-buying program in the next few months. In his view, this is supported in part by low long-term inflation expectations. He also notes that the ECB’s forecasts for core inflation, adjusted for energy prices, and growth in 2016, are probably too optimistic.
The ECB may be acting too slowly for some. Mr. Draghi acknowledged that some of his fellow council members had “hinted at the possibility of acting today,” but added it “wasn’t a prevailing theme of our discussion.” Others, especially in Germany, may be reluctant to expand the purchases at all.
As a result, it is by no means certain that the ECB will boost its bond-buying. Despite the numerous parallels, there are also key differences between the situation now and a year ago. For instance, sentiment indicators are now surprisingly solid and significantly higher, said Mr. Brzeski, the ING-DiBa chief economist. In addition, the oil price and the euro exchange rate are lower than 12 months ago.
What is clear is that December is set to be an exciting month for monetary policy. Both the Federal Reserve and the European Central Bank now face key meetings before the end of the year, and are pointed squarely in different directions. The former may tighten, the latter might loosen.
Jan Mallien covers monetary policy for Handelsblatt from Frankfurt. Christopher Cermak is an editor with Handelsblatt Global Edition in Frankfurt. To contact the author: email@example.com and firstname.lastname@example.org
This story was updated at 15:30 Central European Time Thursday with comments from Mario Draghi’s press conference and from analysts.