Eurozone: ECB sees QE program proceeding smoothly
April 15, 2015
As more recent data for March signaled that economic activity in the Eurozone is gradually improving, monetary authorities at the European Central Bank (ECB) decided to leave the main refinancing rate unchanged at the record low of 0.05% at its policy meeting held on 15 April. The ECB also decided to leave the deposit rate at minus 0.20% and the marginal lending rate at 0.30%. The Bank’s decisions were on par with market expectations.
According to the Bank, following healthy growth in the Eurozone in the fourth quarter of 2014, the latest economic indicators signaled that the economic activity gained momentum at the beginning of 2015. Going forward, the Central Bank stated that it expects economic recovery to broaden and strengthen. Regarding consumer prices, the Bank went on to recognize that inflation remains “very low” and is expected to stay in negative territory in the coming months.
The ECB, which embarked on full-blown quantitative easing on March 9 by starting its monthly purchases of EUR 60 billion, added that the risks surrounding the economic outlook remain on the downside although they had become more balanced due to the ECB’s ultra-loose monetary policy, the fall in oil prices and a weaker euro. According to the Central Bank, its stimulus program is “proceeding smoothly” and is helping to buttress a gradual economic recovery in the common currency area. The Bank’s press conference, however, did not proceed so smoothly; it was briefly disrupted by a young protester in a rare breach of the Bank’s security. The ECB set the deadline for the end of the purchase program at end-September 2016 and emphasized that it is open-ended in nature as the Bank will continue purchasing assets until it sees, “a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term.”
Skepticism persists among many analysts regarding the pace of adjustment of the QE program and its impact on the Eurozone economy. The program has worked so well that some analysts are already speculating about whether the quantitative easing program will be scaled back. Nonetheless, ECB President Mario Draghi pointed out that, at the current stage, monetary authorities are not willing to enter into any discussion around if or when the pace of purchases may be adjusted, tapered or stopped. Draghi went on to emphasize that the program is designed to run until September 2016 or until the ECB sees a sustained increase in inflation.
It remains to be seen whether the QE program will indeed help revive the Eurozone economy and lift inflation. Moreover, Greece’s financial conditions continue to threaten the stability of the Eurozone. Currently, the ECB plays a crucial role in this matter as it controls the flow of emergency lending to Greek banks, without which some would probably collapse.
Author: Ricardo Aceves, Senior Economist