Eurozone bond purchases could still disappoint

 
Chris Papadopoullos
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ECONOMISTS warn there is still room for disappointment regarding a new European government bond purchases – or quantitative easing (QE) – despite expectations that one is guaranteed in the near future.

A ruling on a 2012 emergency government bond buying programme by the European Court of Justice – due on Wednesday – could lead to restrictions on how the policy is pursued.

Secondly, the programme may be put off until the March meeting of European Central Bank (ECB) officials instead of the next one on 22 January.

The ECB may also want to wait and see the outcome of Greek elections on 25 January.

“The proximity of the January meeting to the Greek election adds complexity to the ECB decision,” said economist Mark Wall from Deutsche Bank.

“To avoid disappointment, Draghi will have to send a clear signal on 22 January of imminent QE.”

Disagreement between officials could also dent the policy’s credibility.

The Eurozone entered deflation in November. Inflation expectations as implied by the extra interest paid on inflation-linked assets have been collapsing recently (see chart).

“The ECB needs to act decisively on 22 January if it is to remain credible and put a floor under inflation expectations,” Guy Miller, chief market strategist at Zurich Insurance, told City A.M. Miller also says the ECB needs to be prepared to buy riskier assets to make QE more effective.