Why the ECB hasn’t yet raised interest rates in the Eurozone

Photo The European Central Bank, meeting in Sintra, Portugal, on Thursday, decided to keep its policy unchanged, according to minutes of the meeting that will be released on Friday. In July, the ECB decided…

Why the ECB hasn’t yet raised interest rates in the Eurozone

Photo

The European Central Bank, meeting in Sintra, Portugal, on Thursday, decided to keep its policy unchanged, according to minutes of the meeting that will be released on Friday.

In July, the ECB decided to extend the quantitative easing program by another nine months, to the end of next March. In April, the ECB decided to extend the program from March to December of this year.

These extraordinary steps — unprecedented for the eurozone and the central bank — have gained a lot of praise around the world, as people have expressed hope that, at last, the eurozone economy would see the benefits of austerity and politically forced savings measures that have been rolled out since the financial crisis of 2008.

The economic data has been positive — not bad, but positive — and economists seem to agree that this policy has worked.

“It’s important to bear in mind that the rationale for this policy stems from concerns about deflation and downside risks,” warns Michael Schweitzer, a member of the board of trustees of the International Monetary Fund. “At the end of the day the data justify this kind of action.”

The core inflation target, of 1 percent, was to be reached by the end of this year. Two-year inflation is at about 1.4 percent. According to Ms. Morar, “It is a bit more complicated to forecast what will happen from now until the end of the year because some of these forward-looking elements are not very clear. It is particularly likely that core inflation will gradually stabilize and then start going up.”

However, does the delay really increase the ECB’s ability to influence the situation, is the question on everyone’s lips.

The ECB may be underestimating the risks and underestimating the political willingness to accept the discipline,” warns José Pujol-Garritano, a professor at Oxford University’s Saïd Business School. “I expect the ECB to continue to need to maintain a close monitoring of the situation. The risks that it needs to pay attention to have decreased.”

The bloc is slowly gathering enough momentum to be no longer the focus of financial markets. Investors are still worried, though.

“To the broader investor community, the emphasis is shifting away from expectations of further stimulus to some sort of normalization” says Martin Griesel, vice-president at the Institute of International Finance. “To the detriment of other regions it’s still the focus of central bankers.”

One of the reasons that the central bank sees the rules of the ECB’s quantitative easing policy as still necessary is that countries are still not ready for debt adjustment. The emphasis has also been shifted, yet not completely removed, on political stability.

But probably the biggest threat looming over the Eurozone and its economy is China. China’s economy is slowing down and it has run out of room to grow, but that could have an impact on the rest of the world.

“China has had two major years of adjustment,” says Mr. Boadu. “However, without a rebalancing of production capacity they will not be able to sustain growth at a reasonable level. I think it is likely that the impacts will be modest.”

Mr. Boadu also warns of the falling employment of university graduates in the EU. The expectations of the Eurozone’s young people, as well as its non-professionals, are too high, Mr. Boadu says. Unemployment is also becoming worrisome.

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