Euro zone growth
Recently, the European Central bank raised its euro zone growth forecasts from this year through to 2019 and nudged up its expectations for inflation, now seen at 1.7 percent in 2020, close to its target of almost 2 percent. At the same time, the ECB has decided to keep money pumping into the euro zone economy for as long as needed, despite opposition from some rate setters and increased growth and inflation forecasts for the area. But it has kept its interest rates at rock bottom and also held rigidly to its script on what it plans for next year in asset purchases.
From reliable sources it has been learned that pressure from some policymakers to signal a possible change of plan was rebuffed as, in the opinion of ECB President Mario Draghi and his colleagues, things are looking up and the" revision of the macroeconomic projections is going in the right direction." Speaking to the media, Draghi explained: "An ample degree of monetary stimulus remains necessary." The overall EU economy is in a recovery mode and all indicators are up, including manufacturing, exports and consumption. These are sure signs of progress.
However, better-than-expected growth and, to a lesser extent, inflation are giving fresh ammunition to critics of the ECB's 2.55 trillion euro ($3 trillion) bond-buying programme, such as Dutch central bank governor Klaas Knot. Indeed, two central bank chiefs have spoken to the media disclosing that a minority of ECB rate-setters at a recent meeting demanded that the ECB may change its easy-money pledge if euro zone inflation keeps accelerating. Their suggestions included dropping a pledge to continue to buy bonds until inflation converges to the ECB's target or the option to increase purchases if the outlook worsens.
Some experts say that if inflation continues to increase, the Bank will be forced to change the policy of forward guidance. But most rate-setters opted to simply repeat the ECB's plan to keep buying bonds at least until September and to keep rates at record lows well after that. But Draghi thinks that the quantitative easing asset-buying scheme has not yet "run its course" as thought by some people. Draghi said that he was confident that the inflation target could be reached and he saw no negative effect from tightening by the U.S. Federal Reserve, which announced its third rate hike of 2017.
Having faced five years of negative price pressures, the ECB has deployed its entire policy arsenal, cutting rates into negative territory, giving banks cheap loans and soaking up bonds with an unprecedented 2.55 trillion euros ($3 trillion) of purchases. Its work has paid off as the euro zone recovery is now well into its fifth year thanks to nine million new jobs, letting policymakers curb stimulus from next year and raising the prospect that the lavish bond buys it started in early 2015 could finally end.
Draghi's words have left the market in no doubt the ECB is in no rush to curb stimulus, giving further impetus to consumption and growth. In the present circumstances, it will be some time before the ECB will consider any change in monetary policy support. Nonetheless, in the presence of an expansion which is gaining momentum, ECB's confidence towards the final objective is increasing. In the final analysis, the euro zone economy is making steady progress and full recovery is only a matter of time. Only then will the bonds purchase scheme be brought to an end.