Bank of Spain Says ECB Action Helped Propel Euro-Area Recovery

  • Bank of Spain says ECB’s QE has boosted growth, inflation
  • ECB loose policy has reduced euro-area fragmentation: report

The European Central Bank’s ultra-loose monetary policy has helped boost growth and inflation in the euro area, according to research by the Bank of Spain assessing the impact of quantitative easing in the 19-nation bloc.

The ECB’s actions would have added about 1.4 percentage points to the bloc’s total output and lifted prices by about 1.2 points respectively during the 2015-2016 period, the Bank of Spain said in its annual report. The Spanish central bank also said ECB policy has helped reduce the divergence in financing costs across different countries and is responsible for about 100 basis points of the reduction in long-term yields.

“The ECB’s actions have been efficient in providing the stimulus required in a challenging macroeconomic environment, significantly loosening financing conditions,” the Bank of Spain wrote in a report introduced by Governor Luis Maria Linde. “The estimated impact is superior in the case of public debt and covered bonds.”

Under President Mario Draghi, the ECB has embarked on an unprecedented stimulus program first announced in January last year in an effort to strengthen the bloc’s economy and prop up low inflation closer to target of just under 2 percent. Since then, the institution has beefed up asset purchases by a third to 80 billion euros a month, cut rates deeper into negative territory and expanded the program to include corporate bonds.

Price Boost

Breaking down the figures by year, the Bank of Spain said ECB monetary policy added 0.7 points to the euro area’s GDP and 0.3 points to consumer prices last year. For 2016, stimulus is projected to add 0.7 points to growth and 0.8 points to inflation, according to the report.

The analysis comes a day after the ECB refrained from taking further monetary action after the Governing Council met in Vienna on Thursday. The central bank raised its forecast for growth and inflation for 2016, but warned that further structural reforms are needed to enhance the recovery, which cannot run on monetary policy alone.

The ECB’s own calculations estimate that, without its stimulus, inflation would have been negative in 2015 and about half percentage point lower than the current forecasts in both 2016 and 2017.

“The impact of our measures on euro area GDP is also estimated to be sizeable, helping raise output by around 1.5 percent in the period from 2015-18,” ECB President Mario Draghi said in a speech in Vienna on Thursday.

Impact on Spain

The Spanish central bank’s report estimates quantitative easing will have contributed approximately 1.2 points to Spain’s GDP and 0.9 points to inflation by the end of 2016. After plunging to the worst economic crisis in modern history, the nation experienced a double dip recession and saw the spread on Spanish 10-year bonds widen to a record high of 638 basis points versus similarly dated German bunds in 2012.

According to the Bank of Spain report, the ECB’s monetary stimulus has helped reduce the yield by approximately 130 basis points. The extra yield investors demand to hold Spanish 10-year bonds instead of German debt has narrowed to approximately 136 basis points. The Spanish economy grew 3.2 percent last year, beating the euro zone average.

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