What ECB Officials Are Saying About Additional Stimulus

To ease or not to ease? That is the question that the European Central Bank (ECB) has to answer pretty soon, but policymakers appear to have mixed views at the moment. Here’s what they’ve been saying these days and what their decision could mean for the euro’s forex price action.

Ardo Hansson (Estonia)

forex ecb testimonyWhile most of the ECB commentary that makes it to the financial news headlines imply that the central bank is decidedly dovish, there are some policymakers that aren’t really feelin’ the love for additional stimulus. One of ’em is Estonia’s central bank head and ECB governing council member Ardo Hansson who believes that they shouldn’t lower deposit rates any further.

Hansson explained that he would like to see another batch of euro zone data next month before deciding to act, citing that he expects inflation to start picking up soon. “Inflation numbers in December and January should show sharp increase in headline inflation because of the erosion of the base effect related to the energy prices,” he explained. “That would be interesting and important to see how big that increase in headline inflation is and how that affects the outlook and expectations.”

Erkki Liikanen (Finland)

Although ECB governing council member Erkki Liikanen doesn’t share Hansson’s optimistic outlook for inflation, he pointed out that euro zone growth is actually picking up. The head of Finland’s central bank mentioned that demand in the region remains resilient but that there are still some downside risks, adding that monetary policy easing might not be enough to support growth.

Liikanen also clarified that a rate cut has been discussed by policymakers but that nothing has been decided yet. “When the ECB goes to its December meeting, we have all the available information to work on and assess what action should be taken,” he said.

Jens Weidmann (Germany)

Bundesbank head Jens Weidmann is one of the more outspoken anti-QE members on board, as he has been reiterating that there is no imminent threat of deflation and that additional stimulus might do more harm than good. For him, ramping up the bank’s quantitative easing program might simply increase the amount of non-performing loans among European banks – a view shared by European Central Bank Supervisory Chief Daniele Nouy.

Weidmann also noted that keeping interest rates too low for too long might also pose risks to financial stability. “Monetary policy bears responsibility for … risks to financial stability if they affect the long-run outlook of price stability or our capacity to ensure price stability in the future,” he said in a speech at a conference in Frankfurt last week.

ECB Vice President Vitor Constancio

While ECB Vice President Vitor Constancio has criticized proposals for imposing caps on government bond holdings to prevent financial instability, he didn’t oppose the idea of pumping up stimulus altogether. In fact, he put forward an alternative plan, which involves putting price-based risk weights that would incorporate the banks’ probability of default. Now that’s a lot of financial mumbo-jumbo but the takeaway here is that he’s in the dovish camp, too.

Constancio admitted that inflation expectations have dropped and that there are new downside risks to the euro zone’s feeble economic recovery. He also clarified that policy options are on the table but that nothing is set in stone yet.

ECB Governor Mario Draghi

Last but most definitely not least is ECB head honcho Mario Draghi who has repeatedly highlighted the increased likelihood of further easing in his latest testimonies. He has been particularly vocal about sharing his views on weak inflation and the central bank’s readiness to act.

“If we were to conclude that our medium-term price stability objective is at risk, we would act by using all the instruments available within our mandate to ensure that an appropriate degree of monetary accommodation is maintained,” Super Mario declared. Although Draghi acknowledged that keeping rates low for much longer could spur financial stability issues, he maintained that the ECB has a wide range of other monetary policy tools at their disposal.

Implications for Euro Forex Trends

ECB doves appear to have been hogging the spotlight, having a bigger say in the euro’s forex price action these days. After all, economic data has been mostly on their side, with inflation staying subdued and the region’s top nations showing weak spots. Even though further ECB easing in December ain’t guaranteed yet, forex market watchers are already pricing in high expectations for more stimulus and dragging the shared currency lower in the process.

With easing expectations already heavily priced in for the past few weeks, this opens up the possibility of a “buy the rumor, sell the news” situation for the actual ECB statement in the first week of December. EUR/USD is already trading near this year’s forex lows at 1.0500 and a Fed decision to refrain from tightening might be a potential game changer. Besides, euro depreciation is contributing upward pressure to price levels, lessening the need for the ECB to adjust monetary policy.