ECB Under Pressure to Follow Fed With Purchases, Economists Say

By Gabi Thesing

March 19 (Bloomberg) -- The European Central Bank is under increasing pressure to follow the U.S. Federal Reserve and start buying government or corporate debt to revive its economy, Royal Bank of Scotland Plc economists said.

“The pressure on the ECB to embark on some form of purchase program is increasingly becoming untenable, with every major central bank in the world actively fighting deflation risks through the purchase of government debt,” said Jacques Cailloux, chief European economist at RBS in London. “The pressure on the ECB to act sooner rather than later will not only come from other central banks in the world but also via the exchange rate.”

The euro yesterday rose the most against the dollar in almost nine years after the Fed said it will purchase as much as $300 billion of U.S. government bonds and step up purchases of mortgage bonds, expanding the central bank’s balance sheet by as much as $1.15 trillion. A stronger euro will squeeze European exporters already struggling with a collapse in global orders.

“This is a form of monetary tightening that is difficult for the euro zone to countenance and the ECB will be frustrated that this has been thrust upon the currency union,” said Geoffrey Yu, an analyst at UBS Ltd. in London. “Some tough choices are necessary for the ECB as current monetary policy is no longer sustainable in a recessionary environment.”

The ECB’s benchmark interest rate, at 1.5 percent, is the highest among the Group of Seven industrialized nations.

Quantitative Easing

The Fed and the Bank of Japan have lowered their key rates to close to zero and the Bank of England’s is at 0.5 percent. All three of those central banks have said they will purchase government bonds in an effort to reduce long-term interest rates and revive economic growth, a policy known as quantitative easing.

This “increases the odds that the ECB will embark in some purchase program even sooner than we had anticipated -- we were looking for June as the most likely timing,” Cailloux said. “More importantly from a market standpoint, we believe that the ECB is no longer in the position to rule out the possibility of government debt purchase.”

Economists at UniCredit MIB said the ECB is unlikely to follow suit immediately. While the Fed’s move “puts further pressure on the ECB,” it is “very unlikely that next week the ECB will follow the Fed and the Bank of England in deploying traditional quantitative easing measures,” Marco Annunziata, chief economist at UniCredit in London, said in a note.

The ECB will instead probably cut its main rate by half a percentage point to 1 percent, “buying more time to figure out how to implement quantitative easing in the more complex euro-zone setup,” Annunziata said.

To contact the reporter on this story: Gabi Thesing at gthesing@bloomberg.net