If the ECB is willing to use all its available tools without limit, there is little reason to doubt that it can hit its inflation target of close to 2%. However, making that policy commitment credible remains a great challenge because of the controversy and dissent about acquiring risky government debt.
With the introduction of a negative interest rate on excess bank deposits, it has become clear that the ECB is running out of options. The institution's most important financial political tool - the interest channel - has failed in its objective to encourage lending for investment to curb deflation.
The European Central Bank is today obliged to do exactly the opposite of what is set out by the Treaties: lending to States in order to finance their debts. And to do this just about the worst way: by providing the banks at almost no cost with the means to lend subsequently to States while they target higher lending margins.
Expect next week's policy meetings to signal that central bank stand ready to step in, once again, to maintain the disconnect between buoyant equity markets and sluggish economic conditions -- not as an end in itself but, given Congressional dysfunction, as virtually the only way today to support economic activity (and it is rather imperfect as the expected benefits come with growing costs and risks). Look for the Federal Reserve to alter the thrust of its policy narrative. Rather than advance its prior emphasis on tapering its monthly $85 billion purchases of market securities, it will seek to reassure markets by iterating its willingness to do more if needed. Across the Atlantic, the European Central Bank will face increasing pressure to cut its interest rate (currently at 0.75%) and liberalize the collateral requirements it imposes -- both meant to loosen monetary conditions.