Will ECB win against low inflation by not following Quantitave Easing?

Mario Draghi, President of the European Central Bank (EC Audiovisual Services)

Mario Draghi, President of the European Central Bank (EC Audiovisual Services)

On the 5th of June, the European Central Bank (ECB) decided not to fully deploy all the tools of Quantitative Easing (QE) programme, which showed that the ECB is not yet ready to risk everything in order to deal with low growth and inflation rates. Christine Lagarde, Managing Director of the International Monetary Fund (IMF) said on June 19: “If inflation was to remain stubbornly low, then we would certainly hope that the ECB would take quantitative easing measures by way of purchasing of sovereign bonds”. Does IMF see or predict something that ECB’s officials don’t know?

ECB fears of taking drastic measures

ECB’s sayings that will do whatever it takes to bring growth to the EU and increase medium-term inflation to levels close to 2% haven’t yet materialised. ECB is struggling to avoid the big “guns” of QE which include buying assets to provide banks with more money, to increase liquidity to the market. Furthermore, Mario Draghi, the president of ECB, said to the Dutch newspaper De Telegraaf that the ECB hasn’t yet seen any deflation taking place in matters of prices declining within the EU. Thus, what he is implying is that the European economy doesn’t need for the moment measures like buying government bonds or private sector loans.

ECB’s attempt to bring back growth and higher inflation rates

On the other hand, ECB is hoping to increase inflation by decreasing its key interest rates. The main point that is worth mentioning here is the fact that the deposit interest rates that ECB is granting to banks dropped to -0.1%. That is not something that you see every day. It basically means that banks have to pay the central bank in order to hold their money. That is quite unusual, but it is a way to motivate banks to provide more loans and bring more money to the market.

But this is not beneficial for commercial banks.  By implementing such measures, ECB is telling banks to risk more or keep the money that was intended to be invested to the central bank at their own vaults. Another risk that ECB faces is the possibility that the banks decrease the deposit rate that they provide to their customers’ saving accounts. That is what European savers are more worried about right now even if Mario Draghi said that the measures are only for the rates between the central bank and the commercial banks, not the European citizens-savers.

ECB will not to follow QE

What is ECB waiting for then? Aren’t the inflation rates low enough to justify a fully QE policy? ECB most probably waits to see deflation rates rise up before using all the weapons that has in its arsenal. Is the “fear” of putting a QE policy into force going to work for the good of Europe’s growth? Time will be the ultimate judge in this battle with growth and inflation. The sure thing though is that the IMF is for its own reasons pushing ECB to the path of QE and it is highly likely that commercial banks will lower the deposit rates of their customers’ saving accounts, which will force savers to spend or invest their money elsewhere.

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