Europe’s central bank won’t give up on programme despite problems

The European Central Bank (ECB) is likely to stick to the philosophy of “if you’re in trouble, double,” when its rate-setting team meets on Thursday, according to an economist at one of Germany’s biggest banks.

“It’s clear for most economists that the QE (quantitative easing) programme is not very effective. The central bankers seem to be in the mood that if you’re in trouble, double. The ECB is not ready to give in,” Jörg Krämer, chief economist, Commerzbank, told CNBC Thursday.

Markets are anxiously awaiting ECB President Mario Draghi’s announcement on Thursday of what has been decided at the central bank’s governing council’s regular meeting. While the bank is expected to keep interest rates at their current historically low levels, the council could extend the time frame for its massive bond-buying programme past next March and maybe even announce that it will buy new assets.

The central bank has been trying to push euro zone inflation back to its 2 percent target with a series of measures including: negative deposit rates; a QE programme buying 80 billion euro ($89 billion) of European sovereign and corporate debt every month and interest rates close to zero. However, growth remains anaemic in the euro zone and the influx of money into the financial system has not translated into lending to boost growth.

“The QE programme doesn’t benefit the real economy, but the finance ministers and wealthy people who benefit from rising valuations of apartments and equities,” Krämer argued.

There are also concerns that the bank will run out of bonds to buy, with some safe haven German bonds (Bunds), which must be bought in greater proportion than other euro area bonds under the terms of the QE programme, yielding less than the ECB’s deposit rate of -0.4 percent. One method open to the bank’s governing council could be coupling purchases of negative yielding bonds with higher yielding debt.

Source: CNBC