European Central Bank president Mario Draghi is buying himself more time before deciding whether to hit the quantitative easing button, arguing that the ECB wants to see the outcome of stimulus measures already in place and that falling oil prices cut both ways.
The unchanged stance Thursday came as the ECB reduced its forecasts for both inflation and economic growth, raising the possibility of long-term stagnation feared by businesses, workers and governments. It now expects the 18-country euro zone to expand by only 0.8 per cent this year, 1 per cent next year and 1.5 per cent in 2016, rates that will be wholly incapable of putting a serious dent in the region's double-digit jobless rate.
Only three months ago, the ECB predicted the euro zone would achieve growth rates of 0.9 per cent, 1.6 per cent and 1.9 per cent over the three years.
The inflation forecast was cut to 0.5 per cent for 2014, down from the previous forecast of 0.6 per cent, rising to only 0.7 per cent next year and 1.3 per cent in 2016. Even the 2016 figure is well below the ECB's inflation target of about 2 per cent.
Mr. Draghi noted that the recent plunge in oil prices could push inflation down farther. At the same time, he said that lower energy costs were "unambiguously positive" for Europe and its recovery prospects. Lower prices give consumers more buying power.
Speaking after the ECB's regular monthly policy meeting – interest rates were left unchanged at record lows – Mr. Draghi said the governing council discussed buying "all assets except gold" in any quantitative easing program, leaving open the possibility that corporate as well as sovereign bonds could land on the menu. But he gave no details about the possible timing of any QE program.
Mr. Draghi did brush away suggestions that U.S.-style QE might be illegal and face a challenge in the European Constitutional Court on the grounds that it would constitute the financing of governments, which is beyond the ECB's mandate. "Do you think we would discuss things that are illegal, would that be the best use of our time?" he said during the first press conference in the bank's new building in Frankfurt.
He said it would be "illegal" if the ECB strayed from its mandate of ensuring price stability. "We will not tolerate prolonged deviations from price stability," he said, noting that falling oil prices have depressed inflation rates to lower-than-expected levels.
Mr. Draghi seemed to shed any sense of urgency about moving quickly to reverse falling inflation, which can be highly dangerous to an economy because it encourages consumers and businesses to delay purchases. Last month, when he emphatically stated the ECB needed to raise both inflation and the expectation of inflation "as fast as possible," it seemed that QE was imminent.
The central bank, however, did use the Thursday meeting to strengthen its forward guidance, stating that it "intends" to boost its balance sheet by up to €1-trillion ($1.4-trillion), rather than merely "expecting" it to reach that figure.
The ECB wants to see whether two narrow versions of quantitative easing that were recently launched – the purchase of covered bonds and asset-backed securities – are having any impact before embarking on QE. Since October, some $17.8-billion (U.S.) of covered bonds have been purchased. The asset-backed securities program began only on Nov. 21 and the quantities bought have been much smaller.
The ECB will also want to see whether a new flood of cheap loans to the banks, designed to ease credit, will be effective. The next sale of the LTRO program – long-term refinancing operation – is to start on Dec. 11.
Still, several bank economists, including those at Barclays and Deutsche Bank, expect the ECB to embark on large-scale purchases of sovereign bonds in the first quarter of 2015 even though Germany's central bankers are largely opposed to the plan. Their argument is that QE would reduce governments' incentives to implement economic and market reforms.