-Mario Draghi, ECB President
The European Central Bank does not have any good choices. Inflation in the 18-nation bloc eased back to 0.8% in February and unemployment rate in most countries still at record high, suggesting the region is far away from a stable recovery. With inflation below 1% peripheral countries are condemned to suffer from deflation. While Mario Draghi refrained from additional stimulus during the last meeting, more action from the ECB is just a matter of time. Most of the talk concerns proposals to implement the quantitative easing, following steps from the Fed and BoJ. Another option is a purchase of foreign bonds, like the SNB did.
The key refinancing rate is already close to zero. Excess liquidity is inching lower, as region's banks return funds earlier borrowed under the Long Term Repo facility. EUR/USD trading around 1.39 is dampening exports from the Eurozone. An implementation of negative deposit rate will squeeze banks and money market funds. German Bundesbank has expressed its doubts about the legality of the OMT. Moreover, the central bank has already expressed its interest in reviving the asset-backed securities market in order to boost lending to the Eurozone households, small and medium-sized businesses. While German think tank and the IMF are supporting the U.S.-style QE, buying foreign bonds appears to be the best option for European policymakers.
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