LONDON (Reuters) – After a head-spinning bout of volatility, next week will be dominated by one question: Will the European Central Bank take the ultimate policy leap or pull its punches?
The ECB could launch a government bond-buying programme with new money as soon as its Jan 22 meeting, although Greek elections three days later are a complication.
With markets in an unusually febrile state – oil and copper have plunged while the Swiss franc rocketed after Switzerland abandoned its currency cap – it’s a fair bet that if the ECB holds back, there will be an extreme reaction.
The eurozone’s central bank would have no problem justifying action. It is mandated to deliver price stability and inflation close to 2 per cent whereas this has just turned negative and is likely to fall further given the precipitous oil price drop.
The ECB won crucial backing last week for its pledge to do whatever it takes to support the euro when a top European Union court official said there was no legal impediment to buying government bonds to bolster a listless eurozone economy.
But politics and German concerns about risk-sharing will trump the law.
Sources have told Reuters the ECB may adopt a hybrid approach – buying debt and sharing some of the risk across the eurozone while national central banks make separate purchases of their own. The programme may also be limited in size to 500 billion euros ($578 billion).
But it is possible that the European court judgment will embolden the ECB. Executive Board member Benoit Coeure said on Friday that QE had to be big to have an impact.
“We expect the ECB to announce government bond buying of between 500 billion and 700 billion euros over 18 months that includes all investment grade government bonds,” said Gilles Moec, head of developed Europe economics at Bank of America Merrill Lynch.
All is not well with the world economy. Last week, the World Bank lowered its global growth forecast for this year and next because of poor economic prospects in the eurozone, Japan and major emerging economies.