It’s no secret that the European Central Bank is worried about low inflation rates in Europe that look like they are heading toward deflation, or that ECB president Mario Draghi wants a weaker euro, but until now he hasn’t been willing to engage in Federal Reserve-style qualitative easing, preferring to work indirectly through the banks and through public guidance that hasn’t had as much of an effect on euro-dollar exchange rates as he may have hoped.

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“We believe that the chances of unsterilized large-scale asset purchases (LSAPs) of public and private assets being launched this year have therefore increased to more than 50:50,” wrote Citi analyst Guillaume Menuet (h/t Sara Sjolin at MarketWatch).

ECB has relied on LTROs so far in Eurozone

Aside from low interest rates, the ECB’s monetary tool of choice has been long-term refinancing operations (LTRO). Instead of buying sovereign bonds it has given enormous, low interest loans to banks who then bought the bonds and pocketed the spread. The extent to which the LTROs are being invested in sovereign bonds is difficult to estimate because they are spread out through many banks across the continent instead of being a centralized operation like the Fed’s QE, which can at least be easily tracked.

The original LTROs are also close to coming due, and if periphery banks are forced to repay them in full it will put enough stress on the Eurozone financial system that we could have a repeat of the sovereign debt crisis, so it’s more likely that we will simply see current LTROs (meant to last for three years) rolled over. Some have argued that LTROs are a de facto form of QE because they won’t be called in until banks are good and ready.

LTROs haven’t supported to inflation

While the Eurozone banking sector has stabilized and investors are no longer worried about a sovereign default in the periphery, the LTROs haven’t managed to pull down the value of the euro and every 10% appreciation of the euro reduces inflation by about 40 basis points. The ECB has said that it is willing to use ‘unconventional instruments’ to combat low inflation, and since LTROs, historic low interest rates, and strong commentary about the importance of having a weaker euro hasn’t had much impact on the markets, it seems reasonable that the ECB will eventually have to get more directly involved.