The Phaserl


European Central Bank Gets Ready for More Easy Money

by Frank Shostak, Mises:

On January 21, 2016 European Central Bank (ECB) President Mario Draghi signaled that the governing council may provide more stimulus at its next meeting in March. “There are no limits to how far we’re willing to deploy our instruments,” Draghi predicted.

The ECB president is of the view that the monetary stimulus undertaken by the central bank since June 2014 had strengthened the euro area’s resilience to recent global economic shocks. The yearly growth rate of the ECB balance sheet (an indicator of monetary pumping) jumped from minus 8.5 percent in December 2014 to 31.3 percent by December 2015, whilst the policy rate of the ECB stood at a record low of 0.05 percent.

Change in ECB Balance Sheet
ECB Policy Rate

Notwithstanding this, the president of the ECB holds that so far the central bank has failed to bring the rate of inflation to its target of around 2 percent.

A major factor behind this is a sharp fall in the price of oil, according to Draghi. The yearly growth rate of the CPI stood at 0.2 percent in December.

According to my own models, the growth rate could fall to minus 0.1 percent in December this year. By December next year, I forecast a figure of 0.8 percent. Based on this, it is reasonable to conclude it is likely that the ECB is going to further strengthen the pace of monetary pumping.

Change in Eurozone CPI
Change in Eurozone CPI

The loose monetary stance of the ECB is manifested in the strengthening of the momentum growth of eurozone money supply (as measured by the Austrian money supply or AMS) with the yearly growth rate climbing to 13 percent in November 2015 from 6.5 percent in November 2014.

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