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Trading news
31 Oct 2014
ECB sovereign QE not so imminent - Goldman Sachs
FXStreet (Łódź) - The Goldman Sachs team of economists analyze the possible circumstances in which the ECB could embark on sovereign QE.
Key quotes
"The unique institutional setting of the Euro area increases the (political)fixed cost of adopting sovereign QE relative to other jurisdictions. In an uncertain macroeconomic environment, higher fixed costs increase the option value of waiting before engaging in sovereign purchases. This reasoning both: (1) explains why the ECB has been a laggard relative to its peers in making sovereign purchases in the past; and (2) suggests that the ECB will continue to prove more reluctant to engage in sovereign QE in the future than the conventional market narrative assumes."
"Were the ECB to adopt sovereign QE, we would expect it to act boldly, rather than start in a tentative exploratory manner (as it has on previous occasions when commencing unconventional policy measures). In our view, exploiting announcement effects, so as to shift longer-term inflation expectations and the exchange rate, is the most powerful transmission channel of sovereign QE. Should the ECB act, it would seek to exploit this channel to the full."
"Macroeconomic data – rather than a need to meet some (vaguely defined)target for the ECB’s balance sheet – will define the threshold for the ECB to commence sovereign QE. Given the ECB’s ongoing reluctance to engage in sovereign purchases, we continue to see that threshold as high. While longer-term inflation expectations are an important element of the assessment, we expect ECB decisions to be based on a broad set of macro data rather than developments in a single indicator."
"Euro area growth and inflation are likely to remain undesirably weak, but not sufficiently low to cross the (substantial) threshold to trigger sovereign QE. In this context, the ECB will not sit on its hands. Rather, we expect both a broadening and deepening of its credit easing measures. The ECB is likely to be more active in supporting private credit creation, in particular via banks. In current circumstances, such measures may do more to ease domestic financial conditions than would be achieved by sovereign QE. But they lack the powerful announcement effect that could shift longer-term inflation expectations and the exchange rate substantially."
Key quotes
"The unique institutional setting of the Euro area increases the (political)fixed cost of adopting sovereign QE relative to other jurisdictions. In an uncertain macroeconomic environment, higher fixed costs increase the option value of waiting before engaging in sovereign purchases. This reasoning both: (1) explains why the ECB has been a laggard relative to its peers in making sovereign purchases in the past; and (2) suggests that the ECB will continue to prove more reluctant to engage in sovereign QE in the future than the conventional market narrative assumes."
"Were the ECB to adopt sovereign QE, we would expect it to act boldly, rather than start in a tentative exploratory manner (as it has on previous occasions when commencing unconventional policy measures). In our view, exploiting announcement effects, so as to shift longer-term inflation expectations and the exchange rate, is the most powerful transmission channel of sovereign QE. Should the ECB act, it would seek to exploit this channel to the full."
"Macroeconomic data – rather than a need to meet some (vaguely defined)target for the ECB’s balance sheet – will define the threshold for the ECB to commence sovereign QE. Given the ECB’s ongoing reluctance to engage in sovereign purchases, we continue to see that threshold as high. While longer-term inflation expectations are an important element of the assessment, we expect ECB decisions to be based on a broad set of macro data rather than developments in a single indicator."
"Euro area growth and inflation are likely to remain undesirably weak, but not sufficiently low to cross the (substantial) threshold to trigger sovereign QE. In this context, the ECB will not sit on its hands. Rather, we expect both a broadening and deepening of its credit easing measures. The ECB is likely to be more active in supporting private credit creation, in particular via banks. In current circumstances, such measures may do more to ease domestic financial conditions than would be achieved by sovereign QE. But they lack the powerful announcement effect that could shift longer-term inflation expectations and the exchange rate substantially."