European Central Bank Policymakers Pull the Trigger on Quantitative Easing

January 22, 2015

The ECB today announced a decision to begin buying in March sovereign and private-sector bonds at a pace of EUR 60 billion per month.  Officials took this controversial action, not favored by all, in response to lower-than-expected inflation, weaker-than-desired money and credit growth following earlier initiatives including long-term loans of cheap credit to banks, an acknowledgement that inflation in the near term will stay very low and possibly hover below zero, and concern that in the absence of further monetary stimulus that expected inflation could fall.  The program of asset purchases will continue at least through September 2016, and taking a page from the Bank of Japan’s playbook defined the duration of QE not as a fixed time period but rather as ending only when officials become convinced that the medium-term outlook for inflation is back aligned with the ECB mandate of below but close to 2.0%.  The latest formal inflation forecast, released in early December, predicted a 0.7% rise of consumer prices this year and 1.3% in 2016.  West Texas Intermediate oil prices were 42% higher at the time of that meeting than now, so the inflation forecasts averaging 1.0% per year in 2015-16 are already way too high.  Like their Japanese cohorts, ECB officials even now assume that oil prices will recover gradually this year in next.  This turns the cliche “what goes up must come down” on its head.

Beyond the assumption of rising oil prices, doubts are widespread about the efficacy of quantitative easing in the euro area’s of multiple sovereign debt markets.  President Draghi until now has been stymied by the the continuing weak monetary trends in spite of a negative deposit rate and various unconventional policy steps.  The best chance of lifting regional inflation seemingly rests on a plunge of the euro against the dollar but more importantly in trade-weighted terms.  The common European currency remains some 40% above its October 2000 record low.

Copyright 2015, Larry Greenberg.  All rights reserved.  No redistribution without express permission.



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