Draghi’s QE moves to starting line as economic outlook brightens
The euro-area economy has taken a step in the right direction.
While improving conditions over the past month won’t change Mario Draghi’s plan to start buying government bonds within days, continued economic recuperation may well stir a debate about when to end them. So far, officials have indicated the buying spree could be extended beyond its proposed timetable — a less likely outcome if an easing in the region’s price slump and a drop in unemployment mark the beginning of a trend.
Draghi will have an opportunity in two days to add to details of the 1.1 trillion-euro ($1.2 trillion) quantitative- easing plan, which was announced in January amid dissent from some policy makers. After a Governing Council meeting in Nicosia, he’ll also unveil the ECB’s first growth and inflation forecasts for 2017, numbers that will have significance for the duration of QE.
“The picture for the euro zone appears to be slightly rosier,” said Carsten Brzeski, chief economist at ING DiBa in Frankfurt. “At some point, long-term inflation forecasts and the bank’s commitment to purchase 60 billion euros of assets per month until September 2016 could limit the ECB’s flexibility and put it in an uncomfortable situation.”
Consumer prices in the 19-nation euro area fell 0.3 percent in February, half as much as the previous month and less than economists forecast. Unemployment dropped to 11.2 percent in January, the lowest since April 2012. While the data may indicate the worst is passing, the inflation rate still isn’t anywhere near the ECB’s goal, underlining the case for monetary stimulus.
Open Ended
Purchases under the expanded asset-purchase program are set to start as early as this week. When Draghi announced QE on Jan. 22, he said it would continue for 19 months or until there’s “sustained adjustment” in inflation toward 2 percent.
Some policy makers including Executive Board member Benoit Coeure have said the plan is in fact open ended. “If we haven’t achieved what we want to achieve,” he said in an interview in Davos, Switzerland on Jan. 23, “then we’ll have to do more, or we have to do it for longer.”
In December, the ECB predicted inflation of 0.7 percent in 2015 and 1.3 percent in 2016. Draghi has said that the forecasts didn’t fully consider an oil-price slump, indicating that projections for price growth this year will be cut. At the same time, those for economic expansion may be lifted.
Gradual Improvement
Euro-area economic confidence rose in February to the highest level since July. Car registrations — an indicator for consumer spending — increased the most in over a year in January, and a contraction in bank lending to companies and households came close to a halt.
“For now, the ECB is likely to declare that it stands ready to do more if required,” said Ben May, an economist at Oxford Economics Ltd. in London. “But the gradual improvement in economic conditions and doubts about the feasibility of expanding the bond-purchase program suggests that the QE program is unlikely to be extended in the future.”
Any such decision would come as relief for Bundesbank President Jens Weidmann, who opposed government-bond purchases alongside German Executive Board member Sabine Lautenschlaeger, arguing that the oil-price-driven lull in inflation doesn’t require a policy response. If anything, it serves as mini- stimulus for the region’s weak economy, he said.
The sluggish recovery was highlighted in a report this week that showed manufacturing barely expanded in February as French production plunged. Greece faces a return to recession after the country’s newly elected government under Prime Minister Alexis Tsipras rebelled against conditions of its bailout plan.
Fading Uncertainty
Should uncertainty from Greece fade after a four-month extension of the program and the euro-area economy continue to pick up, ECB officials may find themselves thinking about how to communicate an end of ultra-expansionary policy sooner than previously anticipated.
“Any potential exit will only be guided by our inflation mandate,” Governing Council member Bostjan Jazbec said in an interview in Ljubljana on Jan. 29. “The forecast on inflation will play a decisive role on defining the exit but it is too soon to talk about that now.”
[Bloomberg]
