ECB remains true to course and takes a risk

As expected, the ECB has once again clearly extended its current asset purchasing programme, albeit at a low monthly purchasing volume. By so doing, the ECB is preventing itself from breaching its own limits. Markets have sufficiently honoured the ongoing flow of liquidity, and European equity markets have risen strongly in line with this.

But the important news was that the ECB does not wish to end the programme in the future. While the monthly purchases could be wound back entirely in the medium term, the maturing bonds will be replaced and the current programme will continue to run. This gives the ECB full flexibility since, within the current programme, the possibility naturally exists at all times to adjust the monthly purchasing volume to possible political developments in the euro countries. If a fixed final date had been set for the programme, this flexibility would no longer exist.

The reason given for this decision was once again the still moderate inflation development, with no mention being made of the robust growth. The ECB’s goal remains to achieve an inflation rate of just below 2%.

The ECB is taking on a great risk here. At stable growth, the current monetary policy can very quickly generate a far higher inflation momentum. In this case, the ECB ought actually to embark relatively quickly on a noticeably tighter monetary course. A course change of this kind would most likely weaken growth in the Eurozone and the still unresolved structural problems would become apparent again. A fresh discussion over the stability of the Eurozone would most likely be the consequence.

The ECB therefore appears to be hoping that the current monetary policy will continue to bolster growth, that inflation will not really increase and that the structural weaknesses in the Eurozone will remain concealed. We can only hope that this is the case.

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