Draghi Declares Victory for Bond-Buying Before It StartsSimon Kennedy and Alessandro Speciale
Mario Draghi is claiming victory for his quantitative-easing program before it even starts.
As the European Central Bank president set a start date of Monday for his 1.1 trillion euro ($1.2 trillion) bond-buying program, he said the stimulus will spur the euro area’s fastest economic growth since 2007 and return inflation to the ECB’s goal within three years.
The bullish tone after policy makers met in Nicosia on Thursday signals optimism that what Draghi called the ECB’s “final set of measures” will restore the 19-nation currency bloc to health. The risk is that this is just yet another false dawn, leaving the central bank needing to do more.
“Draghi had a tough battle to reach the QE compromise, now of course he wants to promote it as much as possible,” said Thomas Harjes, senior European economist at Barclays Plc in Frankfurt. “He gave a strong statement that QE will deliver.”
Draghi’s faith in quantitative easing, which he pushed through against German-led opposition, was reflected in the ECB’s new economic forecasts. After consumer prices fell 0.3 percent in February, the central bank now sees a deflationary spiral averted.
Prices are projected to be flat over the whole of 2015. Inflation should average 1.5 percent next year, twice as much as the 0.7 percent estimate in December, and 1.8 percent in 2017. The ECB’s goal is just below 2 percent, a level not seen since early 2012.
As for economic growth, the ECB’s economists lifted their outlook for this year to 1.5 percent from 1 percent, for 2016 to 1.9 percent, and projected 2.1 percent in 2017. The economy hasn’t expanded faster than 2 percent since 2007.
“Our monetary-policy decisions have worked,” Draghi told reporters in the Cypriot capital.
He may be catching a lucky break. Critics of quantitative easing, such as Bundesbank President Jens Weidmann, said the euro-zone economy would enjoy an uplift anyway after oil prices fell by half, the euro tumbled, and stimulus in recent months such as interest-rate cuts take effect.
Whether QE will work “is not that easy to answer,” Bundesbank board member Andreas Dombret said in a Bloomberg Television interview on Thursday. “We don’t have any experience with this quantitative easing, so anybody who knows this now should speak up.”
Euro-area unemployment fell to its lowest since April 2012 in January -- albeit still a hefty 11.2 percent -- and a contraction in bank lending to companies and households has almost halted. Even the February drop in consumer prices was shallower than economists anticipated.
“The ECB may not believe its own luck,” said Christian Schulz, a senior economist at Berenberg Bank in London and a former ECB official.
The central bank may still be forced to inject more stimulus, said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. He warned that private-sector banks may not respond to the ECB’s measures by boosting lending and that there was little demand for cash from companies and consumers anyway.
“We can well imagine the bank having to extend its bond program or even raising the monthly purchase volume,” Kraemer said.
Draghi said that the ECB’s projections are “conditional on the full implementation of all our policy measures”. The QE program will run until September 2016 “or beyond, if needed,” he said.
It wouldn’t be the first time the ECB has had to return to the drawing board. It cut rates, started targeted bank loans, and bought private securities last year, only to find that the measures weren’t enough to revive inflation.
For all Draghi’s optimism, he also reiterated his call for governments to guarantee growth by making their economies more flexible, saying unless reforms are implemented “swiftly, credibly and effectively,” the impact of monetary policy will be lower.
Even so, he rejected suggestions that there won’t be enough bonds for the ECB to buy, saying similar criticisms were made before the Federal Reserve and Bank of England conducted QE. The measures will reinforce and support the improvement in the economy and help reduce economic slack, he said.
“The ECB’s expansionary policy has started to bear fruit even before the bank begins to buy government bonds,” said Tomas Holinka, an economist at Moody’s Analytics Inc.