Dovish Draghi—crying wolf or committed to QE?

Amid heightened expectations of yet more stimulus from the European Central Bank (ECB), one economist is predicting that a Federal Reserve-style quantitative easing (QE) program could be unleashed as early as next week.

After promising an as yet unused bond-buying program back in 2012, ECB President Mario Draghi has been busy cutting interest rates and giving out cheap loans to euro zone banks. In early September he unveiled a slew of stimulus measures which effectively added 1 trillion euros ($1.29 trillion) into the euro zone's flagging economy, according to some analysts. Draghi is still pondering whether to launch a Fed-style government bond purchase program, however, and has used a series of public appearances this week to hint at the prospect.

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Currency traders seem convinced of the central bank's willingness to act - with the euro hitting a near-two-year low on Thursday morning - but equities had a modest start to the session on Thursday, slowly drifting higher after a mixed open.

However, with Draghi becoming an expert in the world of central bank speak, where words are sometimes used at the expense of solid action, some market-watchers have been left second-guessing as to when the bank could be looking to move, if at all.

"The problem with Draghi is he is the central banker that cries wolf so it's unlikely that he will be able to levitate markets with the same story again," Marius Paun and Jonathan Scudaria, two dealers at spread betting firm Capital Spreads, said in a morning note.

Antonin Jullier, global head of equity trading strategy at Citi, believes that equity traders have been completely discounting what Draghi has been saying this summer and not believing his willingness to act with new measures.

"Experience though tells you that if you put a trillion on one side, things tend to trade better. Assets in general and not just equities," he told CNBC Thursday.

When is QE coming?

Global sentiment is so focused on events in Frankfurt that U.S. and Asian markets pushed higher on Wednesday and overnight Thursday and took a lead from Europe. Some traders in the region might still need convincing QE can push stocks higher but nonetheless many high profile investment banks are now adamant that this extra liquidity is on the horizon.

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Last Friday, Barclays stated that a QE program is now its base-case scenario for the euro zone. Willem Buiter, the chief economist at Citi, said in a research note on Wednesday that persistently low inflation in the region will pave the way for a "full-blown" QE program in the next couple of quarters. Claus Vistesen, the chief eurozone economist at Pantheon Macroeconomics, goes one step further and predicts that QE will arrive next month, meaning it could even be unveiled at the ECB's governing council meeting next week. Howard Archer, an economist from IHS Global Insight disagrees though, saying that the ECB is unlikely to act again "anytime soon", adding in a note on Thursday that it still looks questionable whether the ECB is really willing to engage in full-blown QE.

What sort of QE?

A Fed-style package could prove to be a controversial move. This is primarily because there are no common euro zone bonds and, technically, the ECB can't invest in an individual country at the expense of another. Germany, as the largest euro zone country, would likely be the recipient of the largest amount of ECB cash which could dangerously stoke inflation and would be at the expense of some of the smaller, struggling nations. Germany has expressed concerns about the purchasing of government bonds from countries with comparably poor financial discipline.

The simplest program would see the central bank buy government bonds according to the countries' ECB capital subscription, said Vistesen, but adds the alternative would be a targeted effort aimed at the periphery.

"The criteria applied to such a program look dauntingly difficult to implement, and would also likely face staunch opposition from Germany," he said. "The catalyst (for bond buying) will be significant volatility in the periphery, ultimately making it more tenable for the ECB to justify a potentially heavy hand."

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Will it work?

Even with a large-scale QE program in hand, some remain skeptical that it will actually boost inflation and many have already panned the cheap loan program dealt out since the ECB's last meeting.

"Without the help of a coordinated fiscal policy and structural reform effort from governments, we maintain our view that QE alone would fail to generate the desired economic outcomes and risk fuelling potentially destabilizing asset price bubbles," Societe Generale analysts Patrick Legland and Vincent Chaigneau said in a note earlier this week.

"Is QE the answer? Probably not," they added.

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