European Central Bank To Decide Future Of Stimulus

By Mack Wilowski, National News Editor

The European Central Bank (ECB) is expected to announce the end of its quantitative easing program at its upcoming October meeting.

Initially implemented in January 2015 as a means to combat deflation and a sluggish economic recovery across Europe, Quantitative easing ā€“ popularly abbreviated QE ā€“ allowed the European Central Bank to purchase a record amount of Eurozone bonds and other assets while keeping interest rates low.

Over the last two-and-a-half years, the ECB has amassed a record 2.7 trillion Euros ($2.3 trillion) worth of securities and assets through its bond-buying program. While circumstances in early 2015 may have made such stimulus measures beneficial in the eyes of economists, investors, and financiers, the strength of the broader Eurozone economy has strengthened considerably since then. ECB officials are now calling for an end to extraordinary asset purchases.

Annualized GDP growth in the Eurozone has risen from 1.4% at the end of 2014, when the program was initially implemented, to over 2.3% as of the second quarter of 2017. The inflation scenario has been slightly less optimistic for ECB officials ā€“ who target an ideal rate of 2% – but has improved significantly since 2015, rising from -0.7% in January of 2015 to 1.5% as of July.

Regardless of the current sentiment among Eurozone officials, the quantitative easing program is not set to conclude fully until the summer of 2018. The scope of asset purchases will be also be reduced significantly in the coming months. This will likely lead to a further appreciation and strengthening of the Euro against other global currencies, a trend that began in January. The Euro-Dollar exchange rate has risen from $1.03 in early January to slightly under $1.20 as of September 7th.

Once the ECB announces its intentions regarding phasing out quantitative easing, investors will likely sell or unload government bonds in Europe and switch to buying the Euro currency instead.

In recent years, financial markets have tended to overreact to news of central banks tightening their monetary policy. The last such example occurred in the United States in 2013, when bond yields rose sharply after the Federal Reserve announced it would be scaling back its QE program. In the U.S, quantitative easing officially ended in October 2014. However, in Europe, it was still a relatively new phenomenon. Because of this, Mario Draghi along with other ECB officials are sounding a more cautious tone to avoid any sharp downturn in European equity markets.

One of the main challenges for the ECB currently is reducing the impact of a strong Euro on firms and corporations, as their exports become more expensive overseas while import costs go down. Inflation has struggled to meet the target range of just below 2%, a fact that is exacerbated by the appreciation in the currency.

Eurozone growth has picked up considerably since early 2017, after a slow but steady expansion beginning in 2014. The Spanish economy, hard-hit during the financial meltdown and European debt crisis of 2011-2012, has been growing at an average pace of 3% over the last three years, and recently regained its pre-crisis real GDP level. Growth accelerations have also been recorded in Germany, growing at an annualized rate of 2.1% in the second quarter of 2017, as well as France and Italy, growing respectively at 1.7% and 1.5%.

In light of these developments, it is highly likely that the European Central Bank will announce the official end to its stimulus program at its October meeting, while the broader Eurozone economy will continue to improve going into next year.

A version of this article appeared in the Tuesday, September 12th print edition.

Contact Mack at

maciej.wilowski@student.shu.edu

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s