Posted October 28, 2015 Joshua Marsh
The ECB has been running its own QE programme since March 2015, buying €60bn worth of government bonds from around Europe every single month and will continue to do so until at least September 2016. Their main aim was to eventually meet their inflation target of close to, but not exceeding, 2%, after the Eurozone fell into deflation last December. In theory, an injection of money into the private banking sector will encourage them to give out more loans to consumers, who will consequently spend more on goods and services. But nine months down the line, has this actually worked as well as the ECB had hoped back in January?
Firstly, we can look at the European inflation rate in isolation. When the QE programme was announced in January 2015, the rate was down at its lowest level since July 2009, a memorably dark time for global economics, at -0.6%. Following this announcement, the Euro dropped nearly 2% against the dollar to $1.1405. The ECB President, Mario Draghi, claimed that the recent plummet in oil prices has been a major factor in this poor data. Although maybe valid, it is impossible to ignore the problem. However, merely four months after this problem, the inflation data for May 2015 came out as 0.3%, a huge improvement on its recent lows. One can imagine Draghi slept well that night.
Where are we now? The most recent data we can draw on is the figure for September 2015 which came in at -0.1%, the first negative rate since March. This is clearly not a situation Europe is happy to find itself in and consequently, during a downbeat press conference held in Malta on Thursday 22nd October, Draghi signalled expansion to their current QE programme at their next meeting in December. He said the central bank stood ready to adjust the “size, composition and duration” of its QE programme. Following this statement, the Euro fell 1.67% against the dollar to just $1.116, though Draghi maintains that the exchange rate is not a concern at this time. We cannot yet know whether expanding QE will have the desired effect, but we can expect inflation data to strengthen once a year has passed since the end of the dramatic fall in oil prices. This is simply because only data which has been recorded up to 12 months previous to the current date is taken into account when calculating inflation. Whilst I believe that stability in oil prices will aid inflation back towards where it needs to be, the ECB clearly wants to take extra steps towards achieving this by ramping up QE. Will it work? For now, Draghi and the rest of us will have to wait and see.