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


    • 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.
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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.

“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.”

Michael Heise, Chief Economist, Allianz

“There is a noticeable increase in the probability that the ECB will raise its inflation forecasts in June and reduce its bond purchases,” said Stefan Bielmeier, chief economist at DZ Bank. He expects that the Frankfurt-based ECB could cut back its monthly purchasing volume by €10 billion, or $10.78 billion.

So what’s changed in just one month?

For Mr. Bielmeier, the weakening euro exchange rate against the dollar, now at $1.08, and an improving economic outlook on the continent suggest an increase in the ECB’s inflation forecasts could be on the cards.

The central bank’s 2-percent inflation goal seems distant at first glance. The ECB has said it expects prices to remain constant on an annual basis throughout 2015. However, economists note that inflation has already begun rising again on a monthly basis. Annual inflation was well into negative territory in January, at minus 0.6 percent, but in March it had increased to minus 0.1 percent.

Mr. Heise of Allianz is convinced that “we will have a completely different price picture at the end of 2015 than we have today.” He considers it possible that inflation in Germany will approach the 2-percent mark again in early 2016.

Mr. Heise noted there is a strong statistical base effect at play, especially in December and January, which could push inflation up relatively higher by the end of the year. This is why Mr. Heise believes that a complete rethink is possible.

Economists and Mr. Mersch are not the only ones suggesting an earlier end to the bond-buying program, or at least a cut-back in the amount that is purchased each month.

Slovenia’s central bank governor Bostjan Jazbec and his French counterpart Christian Noyer, both of whom sit on the 25-member ECB governing council that decides on monetary policy, have expressed similar views.

The ECB could increase or decrease the monthly volume of €60 billion, or it could shorten or lengthen the duration of the program, Mr. Noyer said at a Paris conference in mid-March.

For some economists however, this smacks of skeptics simply sticking to their original skepticism. Richard Barwell, an economist with the Royal Bank of Scotland, noted that a “handful” of central bank governors had reservations about the program right from the very start. A significant minority in fact voted against the program when it was first adopted in January, but these bankers remain a minority.

Germany’s central bank, the Bundesbank, one of the biggest skeptics of the program, has not expressed itself quite as vocally as some of the other board members. A Bundesbank spokesman said it was still too early in the program to speculate over phasing it out.

But if the economic data changes significantly, the Bundesbank, too, will have to consider adjustments. It just hasn’t reached that threshold yet.

“If we see that we are overdoing it, it will of course be appropriate to question whether we need to modify our plan.”

Yves Mersch, ECB Executive Board member

Sources within the ECB note that the central bank is determined not to allow any doubts arise over its own resolve – a lesson it has learned from the experiences of other countries.

In Japan, for example, the central bank did not pursue a clear objective with its bond purchases at first, which made the program less successful. The ECB argues it has learned from Japan’s mistakes, which is why it has clearly and unmistakably tied its bond purchases to an inflation target.

Mr. Barwell said he believes it is dangerous to even discuss a reduction in the purchases at this point. Much of this is about signaling and confidence, after all. Raising doubts about the program would be “counterproductive” and could destroy the improvements in the economy that have come from its launch.

If that happened, the euro could quickly appreciate again, making it more expensive for euro zone countries to refinance their debt in bond markets and for companies to export their goods abroad.

These dangers are part of the reason why most economists remain convinced, despite their niggling doubts, that the ECB will stay the course on quantitative easing.

“One shouldn’t underestimate the ECB’s determination to see the bond purchases through,” said Ralph Solveen, an economist with Germany’s Commerzbank. In his view, the ECB would only dial back its bond purchases earlier than planned if the economy went into high gear and inflation rose significantly.

Mr. Solveen does not expect this to happen. In light of high levels of consumer debt and the subdued growth of the global economy, he considers strong economic growth and inflation in the euro zone unlikely.

All this suggests the ECB should wait for clearer signs of the effects of its policies on the economy, rather than immediately reach for the exit.

ECB President Mario Draghi is keeping his options open. More than two weeks ago, he stressed that the ECB wants to do more than just bring the inflation rate back toward the 2-percent threshold. It also needs to remain at that level “with a sufficient degree of certainty,” he noted, adding that the ECB will ignore surprising developments in the inflation rate, as long as they are only temporary.


Andrea Cünnen and Jan Mallien are correspondents covering monetary policy and financial markets for Handelsblatt in Frankfurt. Christopher Cermak, an editor with Handelsblatt Global Edition, contributed to this story. To contact the authors: and

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