The ECB Takes A Further Step Towards Monetary Normalisation, Although It May Not Seem So


J.L.M. Campuzano | On Thursday, the ECB confirmed what many analysts were expecting: the limit on expansive monetary measures has now probably been reached, without this meaning there will be an immediate reversal.

And the reason for this? Simply that the risks are more balanced now.

The central bank raised its growth forecasts (one tenth of a percentage point more) and lowered its inflation estimates (one tenth of a percentage point lower in the medium term). In the end, inflation is below the 2.0% target, but with growth of 1.5-2.0% which very close to that considered as potential.

The ECB is relying on this to defend its argument that financial conditions will remain lax for some time, with future hikes in official interest rates coming after the end of the asset purchasing programme. And as you know, the end of QE is planned for December. As a matter of fact, while we have touched a bottom as far as interest rates go, the monetary authorities have left the door open for modifying upwards or downwards the volume of asset purchases depending on the inflation performance. We will see.

Where are we now? After the initial debate about the need to implement such expansive financial conditions as those applied during the crisis, another debate is now starting on how to manage these once the crisis is over. It’s true that the ECB’s explicit objective is to reach a stable inflation rate of close to 2.0% in the medium-term, although it’s also a fact that expansive monetary policy may be less effective in achieving this than in the past in light of the structural problems in the European economy. And here I am referring both to weak growth, with low capital stock looked at from a historic perspective, as well as potential low growth in the face of an economic rigidity which is difficult to combat with measures to boost demand. In fact, little by little the debate is turning towards the potential negative consequences for financial stability from maintaining financial conditions which are too lax for too long a period.

And what about the financial sector?

We can’t say there are credit supply problems at the moment, taking into account the banks’ willingness to lend and the access to funding in the wholesale market under conditions which can’t be improved on. But self-financing is also high, and all of this combines to create a scenario of easy financing in the face of solvent credit demand. And perhaps not so much, although in this case the banks are not the candidates to cover this. There is the risk of over-regulation for the European lenders, while there is limited regulation for shadow banking and the wholesale markets.