Another month of waiting. The European Central Bank will take key decisions on reducing monetary stimulus "probably in October". This was stated by the president of the Eurotower, Mario Draghi, at the end of the governing council which today left the interest rates and the securities purchase program (quantitative easing) unchanged. As most analysts had predicted, the ECB has chosen to stall, postponing until next month the announcement most awaited by the market, the one on the tapering roadmap. “We have not discussed the sequence of return from extraordinary measures,” Draghi stressed.
THE KNOB OF INFLATION
Inflation in the Eurozone is still far from the ECB's target – “close but below 2 percent” – and the reduction in QE would have a depressive effect on price trends, already held back by the strength of the euro (which since beginning of the year gained 13% against the dollar) and by the weakness of oil.
In fact, the technicians of the ECB have revised downwards the inflation forecasts in the euro area: +1,5% in 2017, +1,2% in 2018 and +1,5% in 2019. The filing reflects "mainly the appreciation of the euro”, Draghi confirmed. In short, the strengthening of the single currency recommends postponing the start of the tapering as much as possible.
“The recent volatility of exchange rates – continued the number one of the ECB – represents a source of uncertainty which needs to be monitored as regards the possible implications for the medium-term outlook and for price stability”. In any case, Draghi said he is confident that the economic recovery will allow inflation to return to target levels: "We just need to be patient, we are not resigned to living in an era of low inflation."
GROWTH SPEEDS UP
On the other hand, according to many critics, the recovery of the European economy would justify the start of the monetary policy normalization process, as the German Finance Minister, Wolfgang Schaeuble, and the President of the Bundesbank, Jans Weidmann have pointed out on several occasions . The ECB itself revised upwards the forecasts for the growth of the Eurozone in 2017 (to +2,2% from the +1,9% estimated in June), while confirming those for the following two years: +1,8% in 2018 and +1,7% in 2019.
“The economic expansion, which accelerated beyond expectations in the first half of 2017 – continued Draghi – continues to be solid and well spread across countries and sectors”. As for excess liquidity on the market, "we don't see systemic risks from speculative bubbles," she added.
WHY QE CAN'T GO ON INFINITELY
In any case, the purchase program of the European Central Bank will not be able to continue without changes throughout 2018. The reason is in the same rules of Qe. The distribution of government bond purchases varies in proportion to individual countries' contributions to the ECB's budget, so Germany's debt is the most purchased. At the same time, the ECB cannot forfeit more than a third of a state's debt, so as not to become too cumbersome a creditor.
Now, if the general pace of purchases continues at the current level (60 billion a month), in the spring the central bank would have 33 percent of the German debt in its belly and would have to stop. For this reason, the ECB is likely to reduce the amount of monthly purchases from January.
