FRANKFURT: The European Central Bank is in a policy no man’s land, bombarded by news of a stagnating eurozone economy but hesitant to move forward with new stimulus until measures it loaded in June have ignited.

After the ECB cut interest rates in June and promised banks cheap long-term loans starting in September, about all that is left is printing money to buy bonds — so-called quantitative easing (QE).

But there are tricky practical and political barriers in the ECB’s way: it is boxed in by its own plans, and still faces strong opposition from economic power Germany to any such monetary leniency.

Already deployed by other major central banks, QE could be used to pump money into the eurozone economy with a view to stimulating growth and staving off deflation, which has already gripped some countries in the bloc’s south.

At just 0.4 percent, eurozone inflation is in what the ECB considers a “danger zone”. Economic growth, meanwhile, ground to a halt in the second quarter even before the bloc has started to feel the impact of sanctions on and by Russia over Ukraine. Yet the ECB may be in a wait-and-see mode for some time, waiting until the measures it announced in June kick in.

The first tranche of long-term loans it is offering banks to stimulate lending, called TLTROs, is not available until Sept. 18, with a second shot in December.

“What is happening in geopolitics is tilting the balance toward having to implement further stimulus,” said Andrew Bosomworth, a senior portfolio manager at Pimco, the world’s largest bond investor.

“But I think there are a few things in the pipeline on the positive side that we can point to as well, so we’d put a fifty-fifty chance on QE right now, which brings me to the conclusion that the ECB is in observe-and-analyse mode for now.”

On the plus side, while the economy had no growth in the second quarter, eurozone banks in the same period did ease lending terms for firms for the first time since the start of the financial crisis.

And as well as TLTROs, the ECB is also intensifying preparations to buy asset-backed securities (ABS), which are created by banks pooling loans into an interest-bearing bond that is sold to raise funds.

The ABS market has not recovered following the global financial crisis, but the ECB hopes that by supporting this segment it can get credit to the smaller firms that make up the backbone of the eurozone economy.

Any ABS plan is likely to be small, but the ECB expects take-up of 450-850 billion euros ($601bn-$1.13 trillion) for the TLTROs, potentially more than the total annual GDP of the Netherlands.

Published in Dawn, August 20th, 2014