Will the end of QE come along with ECB’s inflation target?

Klaus Regling, Mario Draghi, Jean-Claude Juncker, Antonio Tajani and Jeroen Dijsselbloem (from left to right)
Date: 02/05/2017. Location: Brussels – EC/Berlaymont. © European Union , 2017 Source: EC – Audiovisual Service Photo: Jennifer Jacquemart

The European Central Bank (ECB) will end its Quantitative Easing (QE) programme within the year as the Eurozone continues growing. However, the inflation rate which is not increasing as much as the ECB officials would like, stands as a barrier to its monetary policy.

According to Reuters, sources close to the ECB mentioned that the central bank is not going to change its policy soon enough because rate regulators need time to evaluate the outlook of the economy and the euro.

The Governing Council member Ardo Hansson stated on the issue last Monday that the ECB should not have any issue at stopping the injection of money to the economy after September 2018. Mr Hansson also pointed that the way of doing that is «in one step».

QE’s future

How long will the ECB use QE as a monetary tool? Is it going to last till September or will Mario Draghi put an earlier closure to this?  The ECB showed last week that it is determined to revise its policy in the beginning of 2018. But it is more likely to take place in March meeting if economic data are the desired ones, rather than next week.

The Estonian policy maker Ardo Hansson said two days ago that it is only rational to end QE after September. More specifically, Mr Hansson mentioned: “There are certainly good reasons to reduce the importance of the net purchases in our communication soon — also with a view to a potential end to these purchases. If growth and inflation continue to evolve broadly in line with the ECB’s latest projection, it would certainly be conceivable and also appropriate to end the purchases after September. The last step to zero is not a big deal anymore. You do not have to do a lot of fine-tuning. I think we can go to zero in one step without any problems.”

Sluggish inflation

But even if the situation in the EU economy is improving at a high speed, there are concerns about inflationary pressures. The latest ECB reports show that there is a decrease in inflation during this quarter whereas it will slightly increase in the next three quarters. The core rate, excluding energy as well as other volatile items such as food, is predicted to remain unchanged but relatively low.

The headline rate is now at 1.4% and the underlying rate is at 0.9%. Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics in Newcastle, U.K. said: “The headline forecast has to go up, but you’re still going to have this divergence in staff forecasts between core inflation and headline. Given the most recent history of the ECB you would expect the doves to win.”

However, the ECB governing council member Francois Villeroy de Galhau said yesterday that ECB is confident that the inflation rate in the eurozone will reach its target of close to 2% even if underlying inflation has been stable at 0.9% for three months. Francois Villeroy was not sure though about the time needed to meet the inflation target but he expressed concerns about the recent exchange rate evolution which could affect the imported prices negatively.

ECB’s concerns of Brexit

The Brexit negotiations are still ongoing with President Donald Tusk to welcome a change in the minds of British people reversing the exit of Britain from the EU. However, Prime Minister Theresa May has denied providing the opportunity to voters to approve whatever withdrawal treaty is agreed with Brussels before Britain leaves the bloc in March 2019.

The governor of the Central Bank of Ireland and member of the ECB’s governing council has said that Brexit could cause serious financial turbulences to the EU. Philip Lane stated that London is too important in financing the Old Continent. More in detail, Mr Lane mentioned:  “The City of London is the wholesale headquarters of the EU. If there is a genuine shock and we have a Brexit without a transition period, then that is a financial stability risk. Brexit is a bigger headache if there is no trade deal; that is what we are looking at most closely, that and [the impact on] financial services.”

On the contrary, the president of ECB believes that Brexit will not have a serious impact in the EU but its consequences will remain within Britain.

All in all, the ECB forecasts have revealed that the monetary policy will be changed with fewer bonds purchases leading to an end for the QE programme. However, it remains to be seen when and under what economic and inflation outlook exactly, the governor of the central bank will alter the central bank’s policy.

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