Draghi postpones decision on extension of QE

ECB president is aiming to build governing council support for further asset purchases, one analyst argues
Mario Draghi

Mario Draghi effectively postponed any decision on whether the European Central Bank (ECB) will extend its quantitative easing (QE) programme until the next meeting of its governing council in December.

The council said its monthly asset purchases of €80 billion ($88 billion) were "intended to run until the end of March 2017, or beyond, if necessary", echoing the language it has used in previous monetary policy decisions. The ECB kept its policy rates unchanged, with the main refinancing rate at 0.00%, the marginal lending facility rate at 0.25% and the deposit facility rate at a negative rate of –0.40%.

Draghi said in a statement that the ECB thought inflation rates were "likely to pick up over the next couple of months", largely owing to "base effects in the annual rate of change of energy prices". Inflation rates "should increase further in 2017 and 2018", he added. He repeated his frequently-made call for eurozone governments to use structural reforms and fiscal policy to support economic recovery.

Several analysts referred to reports that there was a split on the governing council between those in favour of extending asset purchases beyond March 2017, including Draghi, and a minority opposed to this. The latter group is thought to include Bundesbank president Jens Weidmann, several analysts said, as well as the heads of a number of other Northern European central banks.

Daniel Davies, a European banking specialist for Frontline analysts, said he believed the ECB's governing council had a majority in favour of extending QE, including Draghi himself, "but not unanimity". Draghi's actions were being governed by the need to amass as much support as possible within the members of the governing council, said.

The ECB president "will work by majority if necessary, but by consensus for preference", Davies argued. "He's got nothing to lose by waiting, and the possibility of getting what he wants without expending political capital, so why would he do anything now?" Draghi, Davies said, was "a master committee man, and the essence of that art is knowing how to time a vote".

Draghi told a press conference that a "sudden stop" rather than a tapered halt to the ECB's asset purchase programmes was "not in anybody's mind". There were "fairly obvious reasons why this was so".

In response to another question, Draghi largely dismissed concerns raised by British prime minister Theresa May about the distributional consequences of QE policies. While there were some problems with the distributional effects of large-scale asset purchases, research showed that unemployment was the main cause of inequality, Draghi said.

He also disagreed with a questioner who suggested that QE was benefiting large European companies at the expense of small and medium ones. Easier financing for large companies worked to "free up space" for bank lending to small and medium enterprises, Draghi said.

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