The European Central Bank (ECB) intends to maintain the scope of its large-scale asset purchase program with monthly purchases of 60 billion Euro. Despite being criticized, this policy proves to be right, because a first success can already be seen.
The ECB’s overriding objective is to maintain Eurozone inflation in the medium-term at its target value of slightly below 2 percent. Since the end of 2012 it has, however, problems in maintaining its goal: inflation fell up to a minimum of -0.6 percent. The ECB responded with a large-scale asset purchase program, the Public Sector Purchase Program (PSPP), and it intends to stay on course until September 2016, as the ECB notes on its recent press conference on Thursday, 3rd of September 2015.
A first success of the PSPP can already be seen: since the start of the large-scale asset purchases the fall in consumer prices seems to be halted as the Eurozone inflation rate increased slightly to the most recent value of 0.2 percent. More important is that key indicators for the inflation outlook have improved, e.g. the money growth rate, which measures the creation of bank deposits which can be used by households and companies for purchases of consumption and investment goods. With a recent growth rate of 5.3 percent, monetary growth in July 2015 exceeded slightly its reference value of 4.5 percent – indicating that inflation will normalize in the recent future.
In addition to that, the public‘s inflation outlook turned to be more optimistic: The ECB’s survey of professional forecasters revealed that predictions were corrected towards more inflation. Experts expect a rate of inflation of 1.3 percent for the year 2006 and 1.6 percent for the year 2017. Moreover, less experts anticipate deflation for the future. This is good news, since deflationary expectations can be problematic: if firms and households expect falling prices, they will delay their investment and consumption expenditures.
The ECB seems to meet its goal of stabilizing inflation expectations by means of the PSPP. Now it is up to the ECB to stick to its course and maintain the PSPP until its planned end, since the public’s improved inflation outlook is based on maintaining this monetary policy. If the ECB would end the PSPP prematurely, inflation expectations might tilt – hence, it was appropriate that the ECB signalled today decisiveness and announced that it might enlarge the PSPP if necessary.
The recent surge in inflation has sparked a sometimes polarizing debate among central bankers, analysts, policymakers and the wider public. In July 2021, the ECB changed its inflation objective to a symmetric 2% target over the medium term. But euro area ...
The European Union will incur a large amount of debt to finance the Next Generation EU Programme. The repayment of this debt is expected to last until 2058.