The primary objective of the European Central Bank (ECB)’s monetary policy is to maintain price stability, and to aim at inflation rates of below, but close to, 2% over the medium term. The ECB has been running its large-scale asset purchase program (APP) for more than two years – since March 2015 – and questions have emerged about its cost-efficiency.
The annual inflation rate in the euro area has been hovering around the 2% line since January 2017 before falling sharply back to 1.3% in June 2017, fueling assumption that the price stabilization remains a bit shaky and requires some more APP as a result.
Yet, the latest ECB President Mario Draghi’s speech in Sintra (Portugal) was taken by the financial markets as indicative of an upcoming end to the APP, in addition to positive signals regarding political risk and economic growth.
“We should be patient and persistent regarding our monetary policy,” replied Peter Praet, Member of the Executive Board of the ECB, who deemed the APP a global success especially with “deflationary pressures (that) were considerable in 2015” and about which “a sense of urgency (…) no longer applies.”
An assessment shared by his colleague Benoit Coeuré who said that “our policy measures have boosted confidence in the euro area’s growth prospects, which has brought foreign investors back to euro area stock markets.”
While growth remains too weak in light of jobs needs in euro area major countries like France, Italy and Spain, there has been a positive trend building up for some time that has been drawing growing interest from investors lately, particularly from the United States where stock markets have largely surpassed Europe’s performance – meaning that there could be some more upside potential in Europe.
From an analytical viewpoint, the ECB assesses its APP has met its main objectives however there’s no hurry in ending it and any change in monetary policy would be very gradual.