Extension of quantitative easing "close call" for ECB

Jake Cordell
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Draghi will be under the spotlight this week with markets expecting him to act sometime before Christmas
Draghi will be under the spotlight this week with markets expecting him to act sometime before Christmas (Source: Getty)

The European Central Bank (ECB) faces a tough decision this week as it decides whether to unleash a new bout of monetary stimulus to support the Eurozone.

ECB ratesetters will gather in Frankfurt on Thursday, with markets divided as to when president Mario Draghi will announce a hotly-anticipated extension to the Bank's €80bn (£67bn) a month money-printing quantitative easing package. The programme is due to come to a halt in March 2017, but markets are convinced Draghi will pull the trigger on an extension either this week or in December.

Fresh data out this morning added to the conundrum facing the ECB over when to act. While retail sales grew by 1.1 per cent in July, more than twice as fast as expectations, the closely-watched purchasing managers' index (PMI) for the single currency bloc slid to a 19-month low in August.

Read more: Are negative interest rates a disaster waiting to happen?

The weak PMI scores, which still came in above the crucial 50 mark which separates growing economies from contracting ones, nevertheless "fuels concern over the stuttering Eurozone growth," according to Howard Archer of IHS Markit.

"More bad news on Eurozone PMIs, particularly for Germany, point towards the need for yet more intervention from the ECB," IG's Chris Beauchamp added.

Analysts at Societe Generale are predicting the Bank will announce a six-month extension to the quantitative easing programme, while keeping interest rates at their record low of minus 0.4 per cent. Separate figures from the ECB released today showed the Bank's total holdings of government bonds passed €1 trillion in the last days of August in a landmark moment for the bank's QE programme.

However, a relatively quiet summer has prompted Mark Wall, chief economist at Deutsche Bank (DB) to revise his predictions. Stating it was a "close call", Wall said he now thinks Draghi will wait until December. Morgan Stanley also said it could see reasons why the ECB will hold back this week.

While recent unemployment and inflation data missed expectations, increasing the probability of action from the central bank, DB's Wall points out the UK's Brexit vote "has not been much of a shock" to the Eurozone, perhaps giving Draghi room to hold back on firing another bullet from the central bank's emptying chamber just yet.

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