Will the European Central Bank revive its program of bond-buying when it meets on Thursday?
The bank only ended this program of quantitative easing in December. The markets are currently pricing in a new program of 40 billion euros a month in bond purchases–plus a 0.1 percentage point reduction in the central bank’s deposit rate to a negative 0.5%. But there is a strong possibility that opposition from Germany and the Netherlands will force ECB President Mario Draghi to leave the decision to Christine Lagarde, his successor as bank president. That possibility looked more likely when France’s representative on the bank’s board said that the resumption of quantitative easing was “a question to be discussed.”
The opposition gets substantial support from worries that cutting the bank deposit rate–when the ECB pays or in this case charges a bank to keep funds on deposit at the central bank–further below 0% could damage the EuroZone economy by cutting bank profits or encouraging potential depositors to keep their money under their mattresses rather than entrusting them to a bank at a negative rate of return.
The lift for Draghi is especially heavy since current bank rules limit the bank to buying no more than one-third of a country’s bonds and the bank is pressing up against that limit for German, Finnish, and Portuguese bonds. Lifting that limit would require the bank to rewrite its own rules. Or the bank could dodge the issue for a bit by buying just 20 billion euros of bonds a month. That would keep the bank’s purchases under the limit.
Bonds issued by Eurozone member countries have rallied this summer in anticipation of the central bank’s move. Essentially bond traders have been buying bonds in anticipation of selling them to the central bank. For example, buying of German bonds has sent the yield on all maturities into negative territory.
