Quantitative easing is here to stay said the European Central Bank (ECB) Vice President Vitor Constancio said on Tuesday.
Addressing a press conference in Frankfurt, Constancio said the ECB is looking for wage growth that will bolster inflation. He also warned that some of the measures now considered extraordinary may in the years to come be seen as standard. “Non-standard measures are going to be part of our toolkit for some time to come,” Constancio said.
During a Central Bankers conference hosted by the ECB in June in Sintra, Portugal, ECB President Mario Draghi said he is “confident” that the Eurozone is on course to fully heal. “Deflationary forces have been replaced by reflationary ones,” Draghi said.
However, the recent appreciation of the Euro has changed this calculation.
Facing deflationary pressure due to a surge in the Euro’s exchange rate, the Eurozone’s inflation rate has slid from 1,5% to 1,2% in the second quarter of 2017. That is well below the 2% policy target of all central banks.
Currently, the ECB buys €60bn a month in government and corporate bonds. The German Federal Central Bank (Bundesbank) estimated in July that Italy is the biggest beneficiary of the ECB’s quantitative easing programme, followed by the Netherlands and Belgium.
Pressure to fold unwind quantitative easing is mounting for technical and political reasons.
The ECB has pledged not to buy more than 33% of the sovereign debt issued by any EU member state. That limit will be reached in the summer of 2018 for Germany and by December 2018 for France, Italy, and Spain.
At an event organized by the German economic daily Handelsblatt last week, Deutsche Bank’s CEO John Cryan called on the ECB’s Board on Thursday to signal the beginning of the end of the era of cheap money. He warned that cheap liquidity in Europe and the United States is triggering asset bubbles in stocks, bonds, and property.