All aboard for QE2
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All aboard for QE2

The longer the European Central Bank waits to talk about sovereign quantitative easing, the closer sovereign QE seems to become.

Mario Draghi was pressed many times at his press conference on Thursday for an exact figure on the planned ECB balance sheet expansion arising from the combination of the targeted long term refinancing operations (TLTROs), and its ABS and covered bond purchases, but he refused to give one.

“As all our measures work their way through to the economy they will contribute to a return of inflation rates to levels closer to our aim,” he said. “The ultimate and only mandate we have is to bring inflation back to 2%. That is the yardstick by which we will judge these measures.”

Given there are serious questions about how much the purchases can actually contribute to that expansion, and the first round of TLTROs was a let down, you can see why he does not want to set an exact target.

But “work their way through” is not a great phrase to use on inflation expectations. European bourses tumbled and periphery government bonds widened in the trading hours following Draghi’s press conference. A hint on sovereign bond purchases had clearly been priced in.

Berenberg accused the ECB of lacking urgency on Thursday. Manufacturing growth slowed further in September and inflation fell to 0.3%. The 5yr/5yr inflation swap rate was just under 2% when Draghi first hinted at QE with that Jackson Hole speech. It is now 1.9%.

Europe’s central bank has announced it is going to pump €1tr into the markets, and inflation expectations have gone down. The ECB should not be at the whim of a market demanding easy money that will raise their asset prices, but with his hat hung on inflation, Draghi will eventually have to give in to their impatience.

The ECB is even lower on time than it is on inflation. It may not have the luxury of waiting to see if QE1 works.

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