The ECB’s asset purchasing scheme was designed to increase liquidity in the Eurozone economy and defibrillate inflation which had been flat-lining and threatening deflationary pressure. The scheme was started in April 2015 and slated to run until September 2016 at the earliest, but has been extended to run until the end of 2017 (if not longer).
Inflation has picked up in the Eurozone and headline inflation is now marginally above target of “just below” 2%, being on the 2% mark. The head of the ECB, Mario Draghi, has stated that he is “more optimistic” about the prospects for growth within the 19 member group. The ECB has adjusted its growth forecast upwards by 0.1% for this year and next to 1.8 and 1.7% respectively.
The asset purchase programme is set to be trimmed back from €80 billion to €60 billion per month from April, but no further changes have been announced. The ECB has left its interest rates unchanged with the main rate at 0%. Asked about the prospect of a rate rise this year, while the asset purchase scheme is active, Mr Draghi noted that the Bank wished to see “a sustained adjustment in the rate of inflation, and we don’t see it yet… we see progress in the recovery [but] it’s a gradual process”, indicating a “steady as she goes” approach. This (unsurprisingly) is in line with an ECB statement released prior to Mr Draghi’s news conference which stated: “The governing council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.”
While the threat of deflation has receded, the potential turmoil that rancorous Brexit negotiations remains a risk to the wider EU economy. The damage to the UK economy will be substantially worse than the effects on the EU27 economy, but political rhetoric within the governing Conservative party seems particularly belligerent at the moment and it is far from conducive to a smooth divorce process. It is widely expected that the UK will formally announce its intention to leave the bloc before the end of this month.
