Azad Zangana, Senior European Economist at Schroders, gives his views ahead of the ECB decision on 4 December 2014 and comments on what we can expect from the ECB in 2015:
"Macro data from the Eurozone has been slightly better than expected in recent months, although the fall in oil prices is set to push inflation to dangerously low levels. The European Central Bank is edging closer to sovereign QE in response, but is likely to wait a little longer before pulling the trigger.
Overall, we expect the governing council not to announce any further stimulus until Q1 or possibly Q2 2015. We believe there are three conditions the ECB is hoping will materialise, which would stop sovereign QE:
The first is an improvement in bank lending. The second of six targeted long-term refinancing operation (TLTRO) auctions takes place in December which will add more liquidity to the banking sector. Taken together with the ABS and CB purchases, and importantly the end of the asset quality review, we may see bank lending begin to respond early next year.
The second is a further depreciation in the euro. If the Federal Reserve begins to sound more positive on the economy and more hawkish on rates, then this could help move the EUR lower.
The third is a pick up in economic growth and inflation in coming months. Both needed to reduce the risk of deflation.
We expect the ECB to be disappointed, probably on all three factors. On bank lending, we do expect a general improvement in 2015, but it is likely to take longer than many expect. The lags on monetary stimulus can be long, and with a system that is still sickly, attempting to grow its loan book when demand is subdued will be difficult.
With regards to the EUR, despite a reasonably depreciation against the USD this year, with JPY depreciating by more, and with other trading partners also depreciating (Russia along with neighbouring European currencies), the trade weighted EUR has actually appreciated by 1.6% since the start of October. Compared to the start of the year, the euro has depreciated by 3.6% against its main trading partners.
The euro could depreciate further in coming months, but with EM currencies looking shaky due to falling commodity prices, and with the Bank of Japan acting in a more aggressive manner, we suspect the ECB will not achieve the depreciation it desires without sovereign QE.
Finally, because of our expectations on bank lending and the currency, we also doubt the ECB will be happy with the ongoing sluggish growth we are forecasting. The recent fall in oil prices is also likely to push down inflation in the near term, which may adversely affect inflation expectations.
Why would the ECB not conduct sovereign QE? Legal challenges, Germanic inflation fears, and questions over the effectiveness of QE are some of the reasons behind the ECB's hesitancy. Indeed, we have had a number of ECB governing council members cast doubt over whether the ECB will take the step markets are looking for.
The decision is likely to be very close, but for the purpose of our forecast, we are now assuming that the ECB does eventually begin to buy sovereign debt. This is likely to come after both corporate bonds and agency debt are added to ABS and CB purchases, and will probably happen without a formal target on purchases being announced."