ECB president Mario Draghi must be thinking “why always me” as the latest economic data heaped more pressure on Draghi to wave his magic wand (perceived to be quantitative easing through the eyes of financial markets) and fix the ailing Eurozone economy. In particular, inflation just won’t give him a break, falling to 0.3% in August, according to the flash estimate from Eurostat. The decline in inflation is proving to be less “temporary” than Draghi expected, but he is unlikely to announce any new measures at the ECB’s monetary policy meeting this week.
As I have repeatedly written about, the priority for the ECB is fixing the banking channel and hence the monetary policy transmission mechanism. Therefore, I suspect Draghi will focus on the targeted long term refinancing operations (TLTRO’s) and their preparatory work for the outright purchases of asset-backed securities (ABS). The TLTRO’s, announced in June, come into effect this month and are aimed at improving bank lending to the non-financial sector. Also, I would expect Draghi to have some material news on their ABS purchase program, beyond just the name of the consultant he hired! He will again stress the importance of structural reform and the role of fiscal policy in sharing the burden of boosting the Eurozone economy.