Eurozone: ECB reaffirms commitment to QE implementation
June 3, 2015
Recent economic data signal that the recovery in the Eurozone is gaining traction. Economic growth picked up momentum in Q1 over the previous period and leading indicators continue to suggest that economic activity in the Euro area is growing at a healthy pace in Q2. In addition, a preliminary estimate showed that consumer prices in the common-currency block rose for the first time in six months in May. This was welcoming news for policy makers as it eased fears that the Eurozone could fall into a sustained period of falling prices. Against this backdrop, at its monetary policy meeting on 3 June, the Governing Council of the European Central Bank (ECB) decided to leave the main refinancing rate unchanged at the record low of 0.05%. Monetary authorities also decided to leave the deposit rate at minus 0.20% and the marginal lending rate at 0.30%. All of these decisions were in line with market expectations.
In its statement, the ECB recognized that, following the improvement seen in GDP in the first quarter of this year, the recovery in economic activity continued showing signs of, “a modest growth trend in the second quarter.” In addition, the Central Bank pointed out that in the coming months the economic recovery will likely broaden and that domestic demand should support growth given the Bank’s monetary policy ultra-loose measures and the favorable impact on liquidity conditions. Regarding price developments, the ECB noted that inflation has bottomed out, but recognized that, against a backdrop of low oil prices, inflation will likely remain low in the coming months. Nonetheless, inflation expectations are more favorable due to the Bank’s monetary policy measures.
The ECB’s commitment to its quantitative easing (QE) program remains unchanged. Regarding the extraordinary monetary policy measure, ECB President Mario Draghi stated that, “the asset purchase programmes are proceeding well.” The Bank explained, as it had in previous statements, that the asset purchases of EUR 60 billion per month are intended to run until the end of September 2016 and that this is open-ended in nature until the Bank sees a sustained adjustment in the path of inflation. There are increasing signs that the liquidity injected by the quantitative easing program is starting to have an impact on monetary developments. According to the ECB, growth in M3—a measure of broad money that includes cash, short-term debt and savings deposits—picked up momentum in April, growing 5.3% annually, up from a 4.6% increase in March.
Despite the positive economic data, concerns persist regarding Greece’s worsening economic situation. The European Central Bank insisted that it wants Greece to stay in the Eurozone. However, the Bank emphasized that, “there should be a strong agreement. And a strong agreement is one that produces growth, that has social fairness, but that is also fiscally sustainable and addresses the remaining sources or factors of financial instability in the financial sector. So these will be the components of a strong agreement.”
Commenting on the Bank’s assessment of Greece, Frederik Ducrozet, Senior Eurozone Economist at Crédit Agricole stated:
While Draghi said there was no point commenting on ongoing negotiations, he then insisted heavily on the need for “a strong agreement" that would be both credible, and politically and socially acceptable. He added that "a disbursement would be a reason to (re-)consider the limit for Greek Tbills" and the broader liquidity/collateral policy, although it was still premature to do so at this point. In other words, no change from the previous statement, and we stick with our view that the ECB will reluctantly maintain liquidity access for Greek banks as long as negotiations move in the right direction.
Author: Ricardo Aceves, Senior Economist