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The ECB has signaled that it will provide more support to the euro zone economy in the hope of preventing the deterioration of the situation from turning into a recession as the region's huge manufacturing sector shrinks, Global trade and currency wars escalate and the threat of Britain's hard exit from Europe is stepping up.
But the ECB faces two major challenges: first, these challenges in the euro zone stem from external factors, so most of them are beyond the control of monetary policy; and second, the remaining tools available to the ECB are of limited effectiveness when borrowing costs have fallen to record lows.
The reality is that this widely implied round of large-scale monetary easing may deplete the ECB's few policy ammunition, and the ECB's claim that it will someday be able to close the gate of easy money faces more doubts.
German 10-year borrowing costs are already at negative 0.6%, and the trend of the interbank market reflects that the deposit rate of the European Central Bank will fall to negative 0.7% in the coming years, thus approaching the "reverse rate". When interest rates are reversed, further interest rate cuts will backfire.
But ECB President Draghi seems to be trying to avoid mentioning the central bank's limited ammunition, suggesting that policymakers will integrate a variety of modest initiatives into one big plan on September 12, making the market feel that it is a major move. Draghi will hand over the presidency to Lagarde at the end of October.
"The main objective of the program is to maintain the financial easing they have achieved," said Frederik Ducrozet, a strategist at Buda Wealth Management. "The ECB will not admit that the effectiveness of any new easing will be compromised by diminishing returns."
The plan may include lowering deposit rates and introducing new asset purchases. It may also introduce a deposit rate classification system, which will protect the banking sector from the negative impact of ultra-low interest rates to some extent.


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