Macro Weekly
Group Economics
9 September 2016
Has the ECB lost faith in QE? Nick Kounis Head Macro & Financial Markets Research Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com
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ECB keeps policy unchanged despite low inflation outlook… …it still sees positive effects of QE though effectiveness is diminishing Calls for governments to act seem futile… …while ECB policy regime change looks unlikely A technology shock would save the day but short of that… … we are stuck in a low growth, low inflation, low interest rate world …making the eurozone vulnerable to the next economic shock
ECB keeps policy unchanged despite low inflation outlook The ECB kept its monetary policy completely unchanged despite continuing to predict that inflation will undershoot its goal and admitting that the lack of a rise in underlying inflationary pressure was a ‘concern’ (for more detail please see our note ECB Watch – ECB disappoints, but will act soon). This raises a number of questions. Has the ECB lost its faith in QE? Is QE doing more harm than good? Should the ECB adopt another strategy completely? Draghi talks up impact of ECB policy Listening to ECB President Mario Draghi one would think QE (and the central bank’s other unconventional policies) were the best thing to happen to the world since the discovery of electricity. He made a number of claims about the positive effects these policies were having. They had led to lower interest rates on loans and credit was now growing. In addition, the ‘fragmentation’ in the eurozone – with sharply different credit conditions in different countries – was ‘over’. Mr Draghi even had some estimates of how well the policies have worked. Over the period 2016-2018, the ECB estimates that monetary policy will boost economic growth by a cumulative 0.6% and inflation by 0.4%. Though maybe actions speak louder than words Well that begs the question if the policy works so well, why not do more of it to get economic growth and inflation up? Does the ECB’s inaction suggest that it does not really believe in this story? Well the answer to that question is not black and white. The ECB often moves slowly because of the need to gain consensus in the Governing Council. Indeed, it signalled in the press conference that it was moving towards a further easing of monetary policy later in the year. Indeed, Draghi’s assertion that the Council had tasked committees to look into the options seems to be designed to buy some time to build a shared view of what to do.
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