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Is Quantitative Easing Still Possible in Europe?

David Becker
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The ECB cut the main refinancing rate as well as the deposit rate by 10 basis points on Thursday, bringing the deposit rate into negative territory for the first time. At the same time Draghi announced and extension of the 100% allocations in the tenders, an end to SMP sterilization as well as targeted LTROs, which are hoped to improve lending to the private sector. Draghi said rates have likely reached their bottom, although he left the door open for additional measures, including a broad based asset purchase program.

The ECB partly reacted to another downward revision to its inflation forecasts, with the new staff projections lowering the forecast for this year to 0.7% from 1.0% expected back in March. The 2015 projection was cut to 1.1% from 1.3% and the forecast for 2015 was lowered to 1.4% from 1.5%. This means that the ECB no longer sees inflation rising to levels in line with its definition of price stability towards the end of the forecast horizon.

Draghi said Thursday decision was unanimous, which means Bundesbank president Weidmann also backed it, although not surprisingly criticism of the ECB’s step has come mainly from Germany, where members of Merkel’s CDU publicly criticized the move. Savings banks meanwhile warned that the negative deposit rate will hurt German savers. Indeed, it remains to be seen whether banks will pass on the additional costs, although the ECB will hope that the move mainly prevents banks from hoarding cash, as could be seen in the wake of the last LTROs.

So is QE in the cards, Draghi said that QE is still on the table if economic conditions erode. The key will be inflation. If prices moved lower, following this robust stimulus package, Draghi will be there to initiate a bond purchase program.

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