3 Point Analysis | ECB’s QE program counters low growth and inflation
The ECB said it intends to pursue a tactic of “maintaining favorable funding conditions during a pandemic” as the Frankfurt-based organization changes strategy following its December 1.85 trillion euro stimulus package.
ECB Governing Council, chaired by the President Christine Lagarde, will now likely have a meeting this week to discuss the future of the euro and how to steer the markets in a new direction.
«A more realistic goal than aiming for 2% inflation in the coming years is to focus on protecting favorable financial conditions at the lowest possible cost, while allowing for a longer period to reach the inflation target.», – said Anatoly Annenkov, Senior European Economist, Societe Generale.
Some experts believe that the updated ECB policy may be a reason to pay less attention sovereign yield.
«The ECB is trying to shift the market focus from yields to financial conditions. The more the regulator is convinced that the indicators of the financial condition of banks are steadily improving, the less attention will be paid to increasing profitability.», – thinks Mark Wall, chief economist at Deutsche Bank.
Eurozone inflation is close to record lows and ECB staff forecasts for December also predicted new records.. In addition, the recent strengthening of the euro is an additional deterrent to price increases.. The eurozone single currency is currently trading around $ 1.2119 but was closer to $ 1.10 before the pandemic.
Why investors have supported the euro, raises questions from experts. Moreover, everything goes to the fact that the Fed will raise rates much earlier than the ECB.
Lagarde said this month that the regulator will «extremely attentive» to the movement of foreign exchange and its impact on consumer prices. Governor of the Bank of France Francois Villerois de Gallo also highlighted the need to study any negative consequences of the impact strengthening the euro for inflation in an interview with French television.
The ECB is likely to focus on its recently announced strategy overhaul in the next few months..
Since 2003, the Central Bank of the Eurozone has targeted inflation «slightly below 2%» in an attempt to solve the problems associated with a significant increase in consumer prices. Currently, however, the ECB is more concerned that this very growth has declined significantly.. As a result, the revision strategy in Frankfurt could lead to a new goal.
«They will strive to find a consensus before the summer. The expected reformulation of the inflation target to a symmetric level of about 2% should not cause controversy», – says Annenkov.
The key moment will take place in September. Following the summer break, the governing body may need to review its monetary policy six months before the scheduled end of the unprecedented bond purchases.