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QE infinity? Economists believe ECB bond buying could run for years

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The shape and size of the European Central Bank’s new bond-buying program caught market participants off guard, with some now predicting it’ll be years until the euro zone is back to anything approaching normality.

Starting in November, the ECB will make 20 billion euros ($21.9 billion) of net asset purchases per month for as long as it takes for the euro zone’s inflation and growth outlooks to return to satisfactory levels. The purchasing will only end “shortly before” the next rate hike.

ECB President Mario Draghi pointed out Thursday that a major reason for the re-launch of net asset purchases was that inflation expectations remained consistently below the ECB’s target of just below 2%, but implored governments to deploy fiscal policy to supplement his actions.

This will be the second round of quantitative easing (QE) from the ECB, the first coming four years ago in response to the calamitous euro zone debt crisis.

Shweta Singh, managing director of global macro at TS Lombard, said the second round of asset purchases would likely have a “milder impact than QE-I, when borrowing costs were higher, fragmentation across the euro area was severe and domestic risks were far greater.”

“Crucially, there may be much less scope this time for the euro to edge lower and thus boost inflation expectations, while the pool of eligible assets that the ECB can buy has shrunk since QE-I was launched.”

QE infinity?

The smaller increments but open-ended timescale of this second package (QE-II) surprised many, and was well below the 60 billion euro per month implemented at the beginning of QE-I in 2015. The open-ended commitment to continue until the inflation outlook improves carries several implications.

“The sequencing reference also signals that there would only be a short gap between the end of QE and the onset of rate hikes,” Ken Wattret, chief European economist at IHS Markit, said in a note Thursday.

“As we believe rate hikes are well down the line — we have the first DFR (deposit facility rate) hike only in late 2022, with an even later start increasingly likely — this implies a very long period of net asset purchases.”

The ECB forecasts inflation at 1.5% in 2021 which is still below what the ECB regards as “sufficiently close to, but below, 2%,” Berenberg senior European economist Florian Hense pointed out in a note.

“Thus, the ECB seems highly unlikely to raise rates before 2022 — unless inflation were to surprise a lot on the upside,” Hense projected.

“The asset purchase program could therefore last for at least 24 months with a total volume of 480 billion euros. More likely it will last longer.”

Barclays head of economic research Christian Keller anticipates that the asset purchase program will continue at least until the end of 2020.

“We expect the ECB will remain accommodative for a very prolonged period of time. We continue to think that risks to the EA (euro area) growth outlook are skewed to the downside and we do not expect core inflation will re-accelerate in the near term,” Keller said in a research note Thursday.

“As the euro area has arguably entered the mature stage of its economic cycle, we expect interest rates to stay low for a prolonged period and firms’ pricing strategies to remain conservative, and we believe fiscal policy is unlikely to reflate the euro area economy.”

Against this backdrop, Barclays economists do not expect businesses to feel immediate pressure to increase final output prices, and therefore project that core consumer prices are unlikely to catch up to levels consistent with the ECB’s medium-term price stability target. Keller thus expects underlying prices to remain on a “slow recovery trend.”

‘Strong signal for governments’

ECB policymakers unanimously agreed that fiscal policy rather than monetary policy should be the main tool to combat the economic downturn. The duration of the QE program may hinge on the willingness of national governments to take action.

Draghi on Thursday urged “governments with fiscal space” to act in “an effective and timely manner.”

Ana Andrade, Europe analyst at The Economist Intelligence Unit, said in a statement that the open-ended nature of the asset purchase program will be a “strong signal for governments, as it will increase their fiscal space.”

“It could potentially lead them to engage on more fiscal stimulus,” she added.

Hense agreed that by lowering funding costs further, governments may find it easier to finance a “modest fiscal expansion” and the policy might nudge countries with some extra fiscal space, such as Germany, to use it.

“On their own, purchases of 240 billion (euros) in one year will raise the balance sheet of the eurosystem by circa 2 percentage points of GDP (gross domestic product) in a year from its current level of close to 40%.”

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Australian retailers suffer worst quarter in 20 years, exports shine

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Shoppers walk past a retail store in Australia.

Brendon Thorne | Getty Images

Australia’s retailers are facing a consumption drought as the country’s second biggest state locks down to fight the coronavirus and as data showed sales volumes suffered their biggest plunge in two decades in the second quarter.

Retail sales adjusted for inflation slipped 3.4% in the June quarter, Tuesday’s data from the Australian Bureau of Statistics showed, the steepest decline since the introduction of the goods and services tax in 2000. Analysts were expecting a 3.2% fall in the quarter.

The larger-than-expected drop suggests consumer spending will be a drag on gross domestic product growth in the June quarter.

The sales downturn was driven by cafes & restaurants, off 29.1%, and clothing, footwear and personal accessory, down 22%. There were also losses in food retailing.

The slump in volumes contrasts with value-based retail numbers, with June seeing a solid 2.7% jump in monthly sales and May recording a stellar 16.9% rise as shops, restaurants and pubs fully reopened across large parts of Australia.

Economists warned the outlook was clouded by a second wave of coronavirus infections in the state of Victoria, with weekly spending data by the country’s major banks already showing signs of moderation.

Victoria declared a “state of disaster” this week following a relentless surge in coronavirus infections since late June.

In contrast to retailers, Australia’s exporters have been going gangbusters thanks to demand from China for iron ore and other resources, while imports have been hammered by the lockdowns.

Separate data on Tuesday showed the trade surplus swelled to A$8.2 billion in June, taking the total for the second quarter to a whopping A$23.4 billion.

Exports rose 3% in June underpinned in part by sharply rising prices for iron ore and gold, providing a windfall to miners’ earnings and government tax receipts.

Exports to China alone hit an historic high of A$14.6 billion for the month, bringing the rolling 12-month total to A$151 billion.

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New Delhi cannot fully cut off economic ties with Beijing

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India China tensions: New Delhi cannot fully cut off economic ties with Beijing