The European Central Bank (ECB) left policy unchanged in September, the second meeting since the UK voted to leave the EU.
Having also reaffirmed plans to continue with asset purchases of €80bn (£68.9bn) a month to March 2017 and “beyond, if necessary”, Mario Draghi, president of the ECB, stated that current policy measures were proving effective and there is no need for extra stimulus at the moment.
Global macro data released in the period following the UK’s EU referendum result has generally been subdued. However, there appears to be a degree of economic resilience in the eurozone.
It is true the ECB recently lowered its forecasts slightly but the economy is nonetheless expected to continue to expand at a moderate rate, with projected GDP growth of 1.7 per cent in 2016 and 1.6 per cent for both 2017 and 2018.
While inflation is expected to remain low this year at a rate of 0.2 per cent, the ECB is forecasting a rise to 1.2 per cent in 2017 and 1.6 per cent in 2018. In spite of the relatively upbeat outlook for inflation, the actual data has yet to show a meaningful improvement.
On a monthly basis, eurozone consumer prices rose 0.1 per cent from July to August and, at 0.2 per cent, the year-on-year rate remains well short of the ECB’s target of just below 2 per cent.
Persistently low headline inflation has led to concerns it will feed through into lower expectations, making it difficult for the ECB to reach its target. This has led to calls from some quarters for more ECB action.
Over the past few months, Mr Draghi’s response has been to emphasise the limits of what monetary policy in Europe is capable of delivering. Interest rates are already in negative territory, the ECB’s balance sheet has expanded by approximately 30 per cent over the past year and there is a commitment to continued rapid balance sheet expansion – at least for the next six months.
It is hard to envisage what else the ECB could or should be doing to stimulate activity. The ECB’s policy options are, therefore, limited.
What is more, because the value of assets being bought is large and the rules pertaining to those purchases are quite specific, the ECB is facing a supply shortage of government bonds for some countries.
For example, we estimate the ECB already owns around 20 per cent of outstanding German government debt and, if the pace of purchases remains similar to that of the past few months, this will rise to close to 40 per cent in a year’s time. This is above the upper limit of 33 per cent and represents a practical problem in terms of policy implementation.
The broad message is one of greater required support for the European economy from the fiscal side of things, and also in terms of structural change.
Economic growth prospects for the eurozone seem to have picked up a little recently, and this can be at least partly attributed to accommodative ECB policies. Nonetheless, the eurozone faces a significant amount of uncertainty over coming months, much of it related to political event risk.