ECB Announcement Expected to Raise Equities, Prevent Deflation

European stocks advanced for three days in a row as of Monday, as more investors expect the European Central Bank to announce a quantitative easing program that will expand the euro base and stop Eurozone deflation.

The Stoxx Europe 50 index rose 0.6% on Monday, while the Dax saw higher gains, rising over 1% at its highest point, although the index retreated slightly in afternoon trading.

European stocks advanced for three days in a row as of Monday, as more investors expect the European Central Bank to announce a quantitative easing program that will expand the euro base and stop Eurozone deflation.

The Stoxx Europe 50 index rose 0.6% on Monday, while the Dax saw higher gains, rising over 1% at its highest point, although the index retreated slightly in afternoon trading.

ECB President Mario Draghi will speak about the bank’s monetary policy on Thursday, with most analysts predicting the announcement of a broad quantitative easing program that will involve buying over 500 billion euros of bonds and asset-backed securities in open markets.

Economists have recommended a 500 billion euro program, but many analysts say that would be too small and ineffective. Instead, some analysts are predicting anywhere between 550 billion and 1 trillion euros in asset purchases, which would dramatically increase the ECB’s balance sheet and, at least theoretically, spur inflation.

Danish Defense on Franc Rise

The Danish central bank announced a cut to its deposit rate from -0.05% to -0.2%. They cut both the deposit and lending rate by the same amount.

The move comes after Switzerland announced it would abandon the cap that had kept the Swiss franc tied to the euro. Denmark, which is an EU member state but not a euro currency user, has pegged its kroner to the euro since its inception. The Danish central bank’s foreign reserves rose to $70 billion last month, its highest ever.

The currency purchases have been in place to keep the kroner pegged at a 7.6038 exchange rate, with a tolerance band of 2.25%.

Eurozone Deflation

Despite growing urgency abroad and across the Eurozone tackle deflationary pressures, the Bundesbank has largely dismissed such concerns. Noting inflation in core prices excluding energy costs, Bundesbank head Jens Weidmann has repeatedly warned that a large bond-buying program by the ECB would be illegal monetary financing.

Speaking to Reuters, German politician Norbert Barthle said irresponsible governments should not seek growth from QE. “The ECB’s main task was and is to ensure price stability. It should bear that in mind rather than grasping more and more frequently for dubious measures to reflate the economy,” he said.

Many commentators and economists are however warning that delaying the QE program has worsened the disinflationary trend, and could lead to a liquidity trap. In a scathing editorial, Bloomberg’s editors criticized both Mario Draghi and the limitations imposed on him by German policymakers in exacerbating the EU’s situation. “The European Union’s system of economic governance is broken,” the editors said, adding that radical monetary efforts are needed, but unlikely to materialize.

“The problem is that the ECB has shown, again and again, that it is temperamentally and institutionally timid,” Bloomberg’s editors said. “These more radical proposals would divide its policy-making board and court political controversy, to put it mildly.”