ECB Uneasing

Stop in the Name of Nervous Economists!

ECB President Draghi addresses ECB news conference in Frankfurt
Excuse me Mr. Draghi, but were you perhaps a little too hasty?
  • Why it matters

    Why it matters

    An early end to the ECB’s bond-buying could have a massive effect on markets that have grown to rely on cheap money from central banks. Some warn that even the discussion could rattle investors.

  • Facts

    Facts

    • The ECB currently predicts that inflation will only increase to 1.8 percent in 2017.
    • The ECB’s stated medium-term goal is to keep inflation close to but below 2 percent.
    • One ECB board member has suggested the bond-buying program could be dialed back if inflation rises quicker than expected.
  • Audio

    Audio

  • Pdf

 

It’s been just one month since the European Central Bank began a massive €1.14 trillion bond-buying program to stabilize the European economy, and yet central bankers and economists are already starting to talk about when it might come to an end.

The talk is even coming from the ECB itself. Yves Mersch, a member of the central bank’s six-person executive board based in Frankfurt, indicated that the ECB could modify its purchasing program if inflation rose more quickly than previously expected.

“If we see that we are overdoing it, it will of course be appropriate to question whether we need to modify our plan,” Mr. Mersch said Wednesday in an interview with the German financial newspaper Börsen Zeitung.

This is precisely what some economists now expect to happen, based on their latest forecasts for the path of consumer prices in the 19-nation euro currency zone. If inflation rises quicker than the ECB expects, there will be less of a need for the central bank to aggressively plug cheap money into the currency bloc.

“If the price of oil continues to drop and the economy keeps doing as well as it has until now, the ECB could terminate its bond purchases completely by the end of the year,” said Michael Heise, chief economist at insurance giant Allianz.

In March, the ECB’s economic staff predicted that inflation would increase to 1.8 percent only by 2017. Its forecast had factored in the ECB’s so-called “quantitative easing,” the bond-buying program that was announced in January and launched on March 9.

The ECB has said the bond-buying plan, which at the moment foresees the central bank buying €60 billion per month in government bonds and other assets until at least September 2016, was much-needed to eventually bring inflation back to the ECB’s target of “close to but below” 2 percent.

Now, some economists think the ECB may have been too pessimistic.

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