Mario Draghi Seen More Likely to Extend QE After Trump’s Victory

logo-cropped-11ECB likely to extend 80 billion-a-month bond purchase program

Source: The Wall Street Journal

FRANKFURT—The European Central Bank is likely to extend or even boost its €80 billion-a-month bond-purchase program next month following Donald Trump’s unexpected victory in U.S. elections, analysts said.

ECB policy makers are expected to decide on the future of their so-called quantitative-easing program at a policy meeting on Dec. 8. The program is currently scheduled to end in March.

Financial-market uncertainty resulting from Mr. Trump’s victory gives ECB President Mario Draghi “another argument to do what he wants to do anyway, [which is to] prolong the full QE program by up to six months at the December meeting,” said Holger Schmieding, an economist a Berenberg Bank in London.

Under that program, the ECB is buying €80 billion a month of mainly government bonds in an effort to bolster weak growth and inflation in the 19-nation eurozone. However, inflation was just 0.5% in October, far below the ECB’s target of just below 2%, which it has missed for more than three years.

Top ECB officials said on Wednesday that the central bank was determined to keep its easy-money policies in place until inflation returns to target.

The ECB will “continue to support the recovery of the euro area in an uncertain international climate,” Benoît Coeuré, who sits on the ECB’s six-member executive board, wrote in an op-ed published on the central bank’s website.

Peter Praet, the ECB’s top economist, said in Brussels that very low interest rates “will probably prevail for an extended period of time.”

The ECB’s policies are contested. Eurozone banks complain bitterly that negative interest rates ushered in by the ECB undermine their profits, because they can’t easily be passed on to customers. Senior German politicians have criticized the ECB for harming the nation’s savers.

Some ECB policy makers, notably Bundesbank President Jens Weidmann, have indicated they are skeptical of extending the QE program again, citing possible risks and side effects for the eurozone’s €10 trillion economy.

However, the landmark U.S. election result could tilt the debate in December toward those in favor of fresh stimulus, analysts said.

The ECB may even decide to boost its stimulus again if the euro strengthens sustainably against the dollar, by cutting a key interest rate or increasing its monthly bond-purchase volumes, economists at Citi wrote in a research note. The euro rose by more than two cents against the dollar as it became clear that Mr. Trump had won, but the currency has since shed most of those gains.

If emerging-market currencies were to weaken against the euro, then “the ECB may well ease even more [than investors expect] because of the related tightening in financial conditions,” said Frederik Ducrozet, an economist at Banque Pictet & Cie SA in Geneva.

The ECB has said it is monitoring financial-market conditions and is ready to act again, using all the tools at its disposal, if it risks missing its inflation target.

Messrs. Coeuré and Praet both played down the adverse side effects of the ECB’s policies. Mr. Coeuré said such side effects were “at present limited and give us no reason to question their relevance.”

The ECB is also expected to decide next month on changes to the design of QE, to ensure the ECB doesn’t run out of bonds to buy. Any financial-market stress could strengthen the case for “market-friendly options,” such as deviating from buying bonds according to the size of each eurozone economy, Mr. Ducrozet said.

To deal with any short-term market volatility resulting from the U.S. election result, the ECB has dollar swap-lines in place with the U.S. Federal Reserve. Those are designed to improve liquidity conditions in global dollar funding markets by allowing foreign central banks to deliver dollars to domestic banks during times of market stress.