Does Draghi have another ace up his sleeve given his Quantitative Easing failure?

_Mario Draghi ECB

Mario Draghi looks confident here defending Quantitative Easing in 2015, at the EP Committee on Economic and Monetary Affairs Monetary Dialogue, last November. Mario Draghi is the President of the European Central Bank (EP Audiovisual Services, 17/11/2014)

Last Monday Eurostat, the statistical service of the European Union, released a flash estimate for euro area annual inflation revealing a -0,2% inflation rate for February. The latter has worried the European Central Bank’s (ECB) officials and especially its president Mario Draghi. ECB’s Governing Council meeting which is taking place next week will have to reconsider its monetary policy and try to revert the ongoing situation.

However, Europe is experiencing serious problems from which cannot seem to recover. The growth rate in the eurozone manufacturing sector continued to slow down in February according to Eurozone Manufacturing PMI.

Deflation is back

Inflation rate has reached negative areas showing that immediate actions are needed to be taken. The last time that deflation threatened the European edifice was 5 months ago. More in detail, last September’s inflation rate dropped down to -0,1%, mainly driven by the low energy prices. The same is happening now with the effect of low oil prices (-8% compared to 5,4% in January) to be clearly visible.

What is more, services are about to have a 1% annual rate, or 0,2% down compared with January. Food, alcohol and tobacco is estimated to reach 0,7% while non-energy industrial goods will be 0,3%. All main components of the euro area inflation have been decreased contributing to the negative rate this month.

It seems that low energy prices are affecting indirectly the prices of the rest of goods and services which has as a result to lower even more inflation rates. This relation must be estimated by ECB’s analyst because it could affect long-term rates as well.

How will ECB respond?

Needless to say that the above have created an extra burden to ECB’s officials who are now likely to deploy even more the weapons that ECB possesses in its arsenal. The latter is shown at a letter sent by Mario Draghi to Jonas Fernadez, member of the European Parliament. More specifically, the president of the ECB states: “At its next meeting, the Governing Council will benefit from a more comprehensive picture of the economic situation and of the medium-term price outlook, including the new staff macroeconomic projections, which will also cover the year 2018 and include a more in-depth analysis of potential second-round effects. In preparation for the meeting, work is being carried out to ensure that all the technical conditions are in place to make the full range of policy options available for implementation, if needed.”

Mario Draghi is most probably going to proceed to lowering deposit rates by 10 basis points and increasing asset purchases by 10 billion euros. By using these tools, the president of the ECB expects to fight low inflation or deflation rates and reach its inflation target of close but just below 2%.

Is ECB’s policy really working?

But even Quantitative Easing (QE), the powerful weapon of many central banks (including ECB), which is meant to boost stimulus in the staggering European economy is not providing the desired results. When it was launched, back in January 2015, it was claimed to be the European messiah. But more than a year later, it is not working as expected. That is of course also triggered by the uncertain growth outlook of the emerging economies, the turbulences in the financial markets, the geopolitical risks and the low investment and consumer confidence. All the above events are contributing to Europe’s sluggish growth.

Manufacturing sector slows down pressuring ECB

Markit Eurozone Manufacturing PMI report, which is released by the research group Markit and measures the growth of the manufacturing sector, was also disappointing. The data show that the growth rate in the Eurozone decreased to 51.2 in February compared to 52.3 last January. The latter reveals a close to contraction levels manufacturing sector as “expansions in production, new orders, new export business and employment have lost momentum”.

Chris Williamson, Chief Economist at Markit also commented on these findings: “With factory output in the eurozone showing the smallest rise for a year in February, concerns are growing that the region is facing yet another year of sluggish growth in 2016, or even another downturn. With all indicators – from output and demand to employment and prices – turning down, the survey will add pressure to the ECB in order to act quickly and aggressively to avert another economic downturn.”

More measures are needed

During ECB’s meeting that will take place on March 10 it is expected to be announced a more aggressive action plan. But it is quite obvious that even if ECB will further relax its monetary policy, it will not manage to increase inflation rates to close to 2% levels and boost economic growth. “Bolder” measures must be taken that can adequately overcome the effects of the Chinese economy slowdown and the low oil prices.

The critical point here now though is if and when European officials and leaders will address the issues of inflation and growth effectively enough in order to revive surely and steadily Old Continent’s economy.

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