To QE or not to QE?Angus Walker
The market has been largely unresponsive to the ECB’s threat of quantitative easing as the Euro continues to climb.
After a week of robust growth for the currency, ECB president, Mario Draghi commented on Saturday that "a further strengthening of the exchange rate would require further stimulus." Draghi has warned investors of the possibility of quantitative easing for months now, yet the ECB’s comments have remained unconvincing, until now. The directness of Draghi’s remarks over the weekend does appear to have some some investors accepting the ECB’s claim.
As Draghi continues to talk down the euro through quantitative easing, awareness amongst economists that deflationary practices will ensue is growing. According to a Bloomberg survey, sentiment amongst economists is that deflationary practices might occur within the next two months.
The euro-area economy is predicted to grow by 1.2 percent in 2014, according to the International Monetary Fund. By waiting until June to make a decision about economic stimulus the ECB will be able to assess the rate growth and inflation. Whether the ECB will use quantitative easing or another methodology remains unclear, despite all the hints.
The ECB has been testing multiple scenarios and has not yet exhausted more conservative policy measures. Dermot O’Leary, Chief economist at Goodbody Stockers commented on the ECB’s future actions saying, “One of the major reasons for the confusion, it seems to me, is that the ECB hasn’t finished their homework in terms of the impact of the various policy measures.”