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The ECB continues its slow march towards quantitative easing
By Economics Editor Sean Whelan
So, no quantitative easing this month – no surprise there.
But the European Central Bank news conference by Mario Draghi was peppered with references to QE, and a statement from the ECB president that a decision may be taken on using QE early in 2015.
Which, in the long march of the ECB towards QE, counts as another nudge forward.
Clearly the governing council is divided on the issue, and Draghi admitted today that the executive board is not united either – no prizes for guessing which executive board member from a large Euro-area country that might be.
He stressed that buying sovereign bonds of Euro area countries would be legal as part of a QE exercise, as long as it was being done in support of the bank’s mandate, which is price stability (i.e. keeping inflation at or close to 2%), saying the governing council would not waste its time discussing things that were illegal, and adding “not to pursue our mandate would be illegal”.
In the meantime we wait to see how the other policy initiatives announced earlier in the year play out, like the TLTROs – supposed to increase bank lending to the real economy.
Once Draghi had said it’s the new year for QE (if ever), many switched off; but they will have missed a shocking downgrade of the ECB’s growth forecasts – this year’s pared back from 0.9 to 0.8%, but next year’s is marked down from 1.6% to 1%, while 2016 is cut from 1.9% to 1.5%.
Draghi also cut the outlook for inflation next year from 1.1% to 0.7%, even further away from the ECBs mandated inflation rate of 2%.
And that cut came before the recent big oil price drop could be factored in, leaving the ECB president to warn of the big impact the oil price was having on both the economy and on inflation – an impact that largely depends on how long oil prices remain significantly lower.
Draghi also lent his support to the Juncker plan – the proposal from the European Commission to try and coax the private sector into investing some €300 billion over the next three years in European infrastructure and non-bank lending to smaller companies.
The only public money at stake is €21bn to be used effectively as an insurance fund to cover “first loss” on projects bankrolled by the private sector (which has built up massive cash reserves during the financial crisis, but is too nervous to invest them, preventing a solid economic recovery in Europe of the type seen in the US).
The plan is due to be approved by EU leaders at their summit later this month. Draghi said it was the only plan on the fiscal side to try and stimulate the EU economy. So, of course, the ECB backed it.
Finally, a rare laugh from an ECB press conference – at least for us here in Ireland – who saw the humorous side of Draghi’s assertion (following a question about Moral Hazard) that “we are not here to blackmail governments that if they don’t do something we will do something else”.
And that just a few weeks after the publication of the Trichet letters to Brian Lenihan.
