The ECB Goes Rogue
TILBURG – The European Central Bank has done it again. At its recent meeting in Frankfurt, the ECB Governing Council decided to increase bond purchases further, from €60 billion ($67 billion) to €80 billion per month, with corporate bonds now also eligible for purchase. The deposit rate, too, was reduced once again, and now stands at -0.4%. This is far from a neutral policy – and it takes the ECB far beyond its mandate of preserving monetary stability.
The motivation behind the recent policy moves is clear: ECB President Mario Draghi is committed to curbing deflation, a serious threat to economic growth. After all, in a deflationary environment, it is more difficult to repay debt, so companies will tend to postpone investment. Recent Eurostat figures, which show that the annual consumer-price index fell by 0.2% last month, heighten concerns.
But while what is happening is technically deflation – that is, sustained price-level decreases that may be reflected in employment or other contracts – it is not structural deflation. Instead, it largely reflects low oil prices, which have fallen by more than 70% since June 2014. In fact, if we discard energy and food prices, the eurozone is in a situation of structural low inflation. That, together with the oil price, should actually benefit the economy, as it gives a boost to consumption and investment.