The ECB maintains its strategy

The ECB has decided to maintain its interest rates but has changed its quantitative easing operation. The operation is extended to December 2017 at least. It will stop at this date if long term inflation expectations converge to 2%. If it is not the case the operation will continue. There is no mention related to the end of the QE. There is no tapering scenario in the current ECB strategy

The ECB’s behavior is quite simple to understand

It still considers that there is still a downside risk on the Euro Area economic momentum. Growth rate will be stable at 1.6% in 2019 without showing the possibility to o higher. The inflation rate will be at 1.7% in 2019. That’s way below the ECB target at 2%. On the absence of tensions the ECB clearly says that the higher inflation rate (0.6% in November) is linked with the oil price not with tensions inside the economy. That’s the most important point and the explanation of its strategy.
The ECB is clearly bothered by the fact that there are no tensions inside the economy. It means that there is a need to support it. It is not time to announce a tapering process. It could hurt the economy without any rationale behind such an announcement.

The economic situation is still weak and the ECB doesn’t want to change its policy too rapidly as it could be counterproductive. He said that fiscal policy was not proactive enough and said implicitly that it was necessary to differentiate between the new strategy seen in the US after the presidential election and what can be seen in the Euro Area where fiscal policies are almost neutral. Internal demand will not be boosted by tax cuts as it will probably be the case in the US in coming months. There will be a different momentum on both side of the Atlantic and that’s what Draghi said.

The change in the amount of purchases (from EUR 80bn to EUR 60bn) reflects the end of a strong risk of deflation and the technical point related to the size of assets that can be bought (At the same time, the ECB said it was possible to buy assets below the deposit facility rate. It will increase the amount that can be purchased)

These are goods measures from the ECB, simply because the central bank recognizes that the Euro Area is not converging to a strong enough trajectory that could provoke tensions. As far as the ECB recognizes this point it will maintain accommodative monetary policy without a tapering horizon on the agenda.



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