Has the ECB bitten off more than it can chew? Apparently not, say analysts

Just a few weeks ago, Mario Draghi, President of the European Central Bank, announced a 19 month quantitative easing progam in the form of a commitment to buy 60 billion euros worth of assets each month until late 2016.

This represented the latest in the array of measures which the European Central Bank has either taken or been subjected to in efforts to alleviate the downward spiral that the European economy has experienced for more than six years.

State dependency, swingeing youth unemployment, low output and an inability to innovate and repair its continental economy, the Eurozone’s woes are not helped by Greece’s recent election of the Syriza party which made its perspective clear post-election: There would be little effort made to repay the national debt which currently exposes the European Central Bank to almost a third of its entire capitalization.

At the time of implementation, LeapRate highlighted the challenges faced by the European Central Bank in its commitment to buying bonds for 60 billion euros a month, and indeed today it has been reported by Reuters that just three weeks after the implementation of the bond buying program, there is a possibility that the European Central Bank may reduce the amount that is purchased earlier than was agreed, perhaps even during this year.

An upturn in growth or inflation, a dramatic rise in asset prices and a scarcity of bonds have all been cited as factors that could prompt the ECB to “taper” its purchases.

“We expect the ECB will decide to cut back its bond purchases as early as the second half of this year,” said DZ Bank analyst Hendrik Lodde in the Reuters report, further adding that the economy could improve towards year-end.

On March 5, when Mario Draghi introduced the quantitative easing measures, he stated that the bond buying program would remain until September 2016 or until inflation is back on a path towards the bank’s target of close to but below 2%. Reuters considers that markets were fuelled by the belief that this meant the program could go on for longer than the stated duration, which is as expected considering the performance of the euro in recent times and the continent’s financial woes.

ECB insiders have ststed that so far there has been no discussion among policymakers of reducing the quantitative easing – a method known as ‘tapering’ – and Mario Draghi told the European Parliament last week that he believed a recovery in inflation depended on full implementation of the program.

Some analysts say evidence of the tapering debate may at some point emerge in the minutes, or accounts as the ECB calls them, of its policy meetings, the latest of which are published on Thursday.

On launch day, the ECB lifted its growth forecast to 1.5 percent for 2015, from a previous 1 percent and said inflation would rise from zero this year to 1.8 percent in 2018.

Since then, euro zone data has generally beaten forecasts. Business activity this month was its highest since May 2011, and inflation is expected to nudge back into positive territory after months of declines.

“I think that the ECB could consider tapering before September 2016 if it was really convinced that it no longer needs QE to achieve a return to price stability (lower but close to 2 percent) on a sustained basis,” Francesco Papadia, a former ECB director general for market operations explained to Reuters.

“However the hurdle to take such a decision will be at least as high as the hurdle to decide on QE,” he added, as tapering before the due end date would be an effective tightening of policy compared with market expectations.

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