The European Central Bank said it will start printing money to buy bonds as of today and delivered a robust economic outlook that will make it hard to extend the plan beyond its envisaged Sept. 2016 end-date. The ECB is embarking on the program of quantitative easing (QE) with a view to raising eurozone inflation from below zero back towards its goal of just under 2 percent, and to helping buoy economies across the 19-country bloc. The ECB, which left interest rates on hold at record lows just above zero at its meeting off-base in Cyprus on Thursday, lifted its growth forecast to 1.5 percent for this year, from the 1.0 percent it predicted in December. ECB staff foresaw eurozone inflation rising from 0 percent this year to 1.8 percent in 2017, which would put it in line with the bank's target of close to but below 2 percent. "If these very bullish forecasts are met, there certainly won't be more QE after September 2016," said Berenberg bank economist Christian Schulz. "In fact, they might then start discussing normalising policy rates at some point." But the bank still has a long way to go to convince markets its plans will be effective. Only half of the economists polled by Reuters think bond buying will help inflation rise towards the target and half think the purchases will be extended. The eurozone's central bank has said it will buy 60 billion euros (43 billion pounds) a month until Sept. 2016 or until inflation is pushed backed towards a target of close to but below 2 percent. Economists and investors have questioned whether the ECB could accelerate or extend its bond buying should inflation fail to return from below zero to its target. An analysis of Reuters polls shows more than half the eurozone's most important reports on economic data since the start of the year have beaten the consensus forecast. Many have topped the highest prediction. Germany, Europe's largest economy, has led the way. "Looking ahead, we expect the economic recovery to broaden and strengthen gradually," ECB President Draghi told a news conference. There are tentative signs that inflation, now running at -0.3 percent, has bottomed out. The February reading was above forecasts, oil prices have rebounded from January lows, growth is picking up and the euro hit an 11-year low against the dollar on Thursday, boosting prospects for higher imported inflation.
"The risks surrounding the economic outlook for the euro area remain on the downside but have diminished following recent monetary policy decisions and the fall in oil prices," Draghi said, firming up his language from the ECB's Jan. 22 meeting. Anticipation of the QE program has driven eurozone borrowing costs down to the point where Spain can borrow for 10 years at under 1.3 percent and investors actually pay for the privilege of lending to Germany for five years. Yields in Italy, Spain and Portugal dropped to record lows this week. Some analysts have suggested the ECB would distort the bond market by buying bonds with negative yields. Draghi said it would only steer clear of bonds with yields below the ECB's -0.2 percent deposit rate. Under the plan, the eurozone's national central banks will focus exclusively on buying on their domestic bond market - a move aimed at assuaging the concerns of Germans worried that pooling risks could leave them to foot the bill for any losses.
About the author
Research Associate at Center for Islam and Global Affairs (CIGA) at Istanbul Sabahattin Zaim University