ECB division on wording fails to impress

4/12/2014

By James Mackintosh

Markets expect much from next ECB meeting. If Mr Draghi does not deliver, fall-out will be painful

Perhaps this is what happens when Italians and Germans argue in English. The European Central Bank’s governing council divided on Thursday over whether to strengthen its language from saying it “expected” to expand its balance sheet by €1tn to say it “intended” the expansion.

Mario Draghi, ECB president, secured a majority for “intended”. But one can only wonder at the German objectors; do they “expect” a €1tn expansion by accident?

Whether there is a dictionary in the expensive new Frankfurt HQ of the ECB remains a mystery. The effect on the markets is not: equities plunged, led down by a fall at its worst of 3.5 per cent in eurozone bank shares, while the euro strengthened and peripheral bond spreads widened.

If the ECB cannot even agree that it “intends” to expand its balance sheet (which has shrunk from 32 per cent to about 21 per cent of the economy since 2012, even as the US and Japanese central banks expanded rapidly), what chance that policymakers will agree to buy sovereign bonds?

Markets had hoped for far more. Still, Mr Draghi is obviously in favour of QE himself. He insisted buying sovereign bonds was legal, something many in Germany dispute. He said further monetary action was necessary (indeed, he implied it would be required) if inflation stays low for “too protracted” a period. He confirmed that the ECB had discussed buying every asset except gold. And he said that “early next year” the effects of stimulus would be assessed, and further measures taken if needed — although this could just be a description of every monthly meeting.

The over-riding impression (backed by last night’s Bloomberg story on January QE plans) is that the ECB is on course to start sovereign QE soon, assuming no surprise bounce in inflation. Germany’s Bundesbank seems likely to remain opposed, so such action would be politically divisive. But investors should remember we have been here before. Mr Draghi is the master of promises, and again has done everything he could to reassure, short of doing anything meaningful.

Markets are set to go into January’s ECB meeting with even higher expectations than they had this time. If Mr Draghi does not deliver, market fall-out will be painful.

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