Ferdinando Giugliano, (2018), “The Punk Rock Life Is No Place for the ECB”, Bloomberg Opinion, 15 November
The ECB should pay very close attention to how any new data or market moves that come in before its next meeting, on Dec. 13, change the outlook for prices. Even then, it is very hard to see officials reneging on their guidance that they will end quantitative easing in December: The ECB launched its bond purchase program at the start of 2015 to stave off the risk of deflation. While core inflation is only gently rising, the headline rate is now above the bank’s target of close to but below 2 percent. These figures make it much harder to justify an extension of QE.
However, officials have other instruments to address risks to prices. For a start, they will continue to reinvest the proceeds from bond redemptions. This can be engineered to provide greater stimulus, for example buying more longer-term debt in lieu of shorter-dated securities. Most importantly, it could use forward guidance to push back market expectations over the first interest-rate rise, which would weaken the euro and further loosen financial conditions.
Ultimately, the ECB’s next moves will depend on what happens to inflation. It will only be able to reopen its toolkit if underlying price pressures in the euro zone remain weak. It would find it harder to intervene again to combat a slowdown if core inflation were to climb suddenly.
Policy makers guided by the inflation outlook? It sounds the stuff of boring central banking — not of punk rock.
Relevant Posts
- ECB, (2018), «Annual Report 2017», April
- Gürkaynak, Refet, Weil, Philippe, (2017), «Eurozone economic recovery: Humming along just fine», VoxEU, 24 August