Mario Draghi confirmed on Thursday that the European Central Bank (ECB) will continue to buy €60bn worth of government bonds.
Going against pressure from the German banking system to unwind quantitative easing, Draghi went as far as suggesting that the ECB is ready to increase the pace of its asset-buying programme.
Systemically, that could prove problematic.
Buying more government bonds would automatically limit the time span of the €2,3 trillion programme. The ECB has pledged not to buy more than 33% of the sovereign debt issued by any EU member state. At the current pace that limit will be reached in the summer of 2018 for Germany and by December 2018 for France, Italy, and Spain.
Still, there was good reason to tell the markets that quantitative easing is not over in the Eurozone. Most significantly, Draghi expressed concern over the steep appreciation of the Euro.
Since January 2017 the Euro has gained 14% against the dollar. According to Draghi, this development could pose a threat, undermining exports, growth, and putting further downward pressure on inflation. Although the exchange rate is not a policy target, Draghi made clear he needed to take it into account due to its effect on growth and inflation.
“The medium-term outlook for inflation was revised downward in the staff’s projections, mainly due to the appreciation of the exchange rate,” Draghi said. Inflation is now projected to fall from 1,5% to 1,2%, which is far off the 2% policy objective of the ECB.
However, the appreciation of the Euro has not as yet hurt growth.
On the contrary, the Eurozone’s growth projection for 2017 has risen from 1,9% to 2,2% for 2017. That is the fastest growth since 2007.