Expectations are building that the European Central Bank (ECB) may consider quantitative easing (QE) to stimulate the economy, but research house Capital Economics says it might not be the panacea that investors are hoping for.
Comments from ECB President Mario Draghi following the central bank's April policy meeting caught investors off guard. Draghi said "The (ECB's) Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation."
Some investors interpreted "unconventional instruments" as a signal the ECB may consider QE. Unlike the Federal Reserve, the ECB avoided using QE following the 2008 financial crisis, opting instead to boost growth by lowering interest rates and providing banks with unlimited liquidity.
"Of course, the mere announcement of any form of QE could have the desired impact across the board, as it would mark a break from the past and signal the willingness to do more," said Capital Economics' chief economist Julian Jessop. "But the options are now being so widely discussed that it is difficult to believe that some action is not already priced in."
Jessop added that it was hard to see an outcome that pleases all investors - including those anticipating a sharp decline in the euro as well as further large gains both for bonds and equities.
"We do not expect it to be a game-changer for the economy, and what happens on the other side of the Atlantic may ultimately prove much more important for the markets," Jessop said.