The President of the European Central Bank, Mario Draghi, is likely to pave the way for a second wave of quantitative easing before he leaves office in October.
At a crucial ECB board meeting on Thursday, he is expected to make the case for a new bond-buying program, in response to worries about an economic slowdown and subdued inflation in the eurozone. The ECB already owns €2,6 trillion of sovereign debt.
In addition, the ECB could opt for further interest rate cuts to bolster liquidity and stimulate investment, as Germany is on the brink of recession.
However, German, Dutch, Austrian, Estonian, and French central banks want a more gradual approach.
Cheap liquidity and negative interest rates are putting pressure on the insurance and banking sectors, whilst stimulating an asset-bubble in real estate markets across the EU. But the debate is mostly centred on the size of the new quantitative easing program rather than policy direction as such. It is a matter of pace.
Markets expect that monetary policy will remain expansionary, with sovereign bond yields falling to multi-year lows.
German government bonds with up to 30 years in maturity already offer negative yields, which is why French central bank governor François Villeroy de Galhau has expressed doubts on whether this is the right time to relaunch quantitative easing.
A more strategic discussion is the portfolio of ECB debt. Current rules stipulate that the ECB cannot purchase more than a 33% share of a member states debt. This will determine which countries can benefit and to what extent from the asset-buying program. For the moment, Italy is the biggest beneficiary.
Another issue under negotiation is the ECB’s deposit rate.
While banks are under pressure to bolster their capital buffers and increase the resilience of the banking system, there is also pressure to channel capital to the real economy at lower rates, especially in the European south.
Since March 2016, the ECB has set a minus 0.4% deposit rate and the ECB is now considering dropping that to minus 0.5 or even 0.6. One of the proposals put forward is “tiering” – which has been tried in Japan – that would exclude a share of excess deposits from negative interest rates. The debate lies at the heart of eurozone imbalances with northern European banks paying more for large excess deposits while southern lenders are seeking for cheaper liquidity.
Ahead of a looming Brexit deadline, an escalating Sino-American trade war and increasing political volatility, Draghi is said to favour an environment of increased liquidity and systemic resilience.