ECB Could Unveil Asset Purchase Program Soon

The European Central Bank may soon have to roll out the heavy artillery, in the form of an asset purchase program similar to those in the U.S., U.K. and Japan, to fight the specter of deflation. But in a currency union with 18 different sovereign bonds, the tough question will be what to buy.

The best solution: Purchase loans from banks — what I call euro quantitative easing in bank loans.

Despite substantial progress over the past year, the euro-area economy remains vulnerable. Spare capacity and weak growth, along with relative price cuts by countries trying to restore competitiveness, is putting severe downward pressure on inflation. The transition to a European banking union has been prompting banks to cut back on lending for fear of being required to raise more capital, generating a further disinflationary impulse. Deflation, or even sustained very low inflation throughout the euro area, would raise the burden of debt in inflation-adjusted terms, and make it harder for struggling countries to regain competitiveness and bring down their debts.

If the economic outlook and lending trends don’t improve, the ECB will have to consider further monetary stimulus at its next policy-making meeting in early March. Its options include reducing its main refinancing rate to 0.10 percent from the current 0.25 percent, and altering the supply of bank reserves with an eye toward imposing a negative interest rate on deposits at the ECB — a policy that would encourage putting the money to work rather than parking it at the central bank.

via Bloomberg

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza