ECB: Preserve flexibility

We view critically the European Central Bank’s decision to extend its bond purchasing program beyond the end of 2017 until well into 2018. Although the halving of the volume of net purchases from EUR 60bn to EUR 30bn a month from the start of 2018 is a step in the right direction, this cannot hide the fact that the planned net purchase of bonds for at least nine months next year is much too expansionary given the healthy economic prospects and stable inflation outlook.

In our view such a substantial degree of monetary accommodation as the ECB deems necessary with regard to higher core inflation and hence headline inflation is not needed. In view of the ongoing economic upswing and the strong rise in employment in the eurozone, the foundation is laid for a return to higher cost and price inflation. Our estimates show that there is still a link between unemployment and wage growth that is likely to mean that the rise in unit wage costs will rise from around 1% at present to around 2% in two years’ time. This path is preordained even without additional monetary policy measures and will exert upward pressure on core inflation.

The substantial extension of the timeframe of the bond purchasing program also means that the ECB’s exit from its zero interest rate policy has probably been pushed back yet further. The ECB has at least so far stressed that key rates will remain at their current level well beyond the time horizon of the asset purchase program. We view this critically as well. A correction in key rates should in principle not be tied to the lowering of the curtain on unconventional measures. Apart from the mounting risks to financial market stability from an overly loose monetary policy, it would be disastrous for the central bank’s leeway to act if key rates were not to be lifted above zero until the closing stages of the economic upswing.

Given the large time lag of monetary policy and the related risk of pro-cyclical effects, the ECB would be well advised to avoid binding commitments as far as possible. The current pickup in economic momentum argues fairly clearly for a correction in monetary policy. Should setbacks from global economic or political risks arise in the coming months, fresh monetary policy impetus is conceivable. In the current situation the ECB should preserve its flexibility and room for maneuver.


Dr. Michael Heise

Allianz SE
Phone +49.89.3800-16143

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Dr. Rolf Schneider

Allianz SE
Phone +49.69.24431-5790

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