Are the ECB’s choices understandable? – Natixis

Patrick Artus, Research Analyst at Natixis, explains that the euro-zone economy is improving markedly, the unemployment rate is nearing the structural unemployment rate and deflation is no longer a threat, and yet the ECB is keeping a highly expansionary monetary policy in place.

Key Quotes

“Is this choice understandable?

• We do not believe that it truly results from a desire to lift inflation to close to 2%, now that deflation is no longer a threat;
• It may result from the idea that even when the economy is close to full employment, demand stimulus can have positive effects: increasing the participation rate, encouraging companies to make productivity gains;
• It may also result from concern at what could ensue should the bond bubble burst in the euro zone: crisis among institutional investors, public finance crisis.”

“Conclusion: It is not so easy to understand the ECB

Why is the ECB keeping an expansionary monetary policy in place when the euro-zone economy is improving?

- We do not believe that it is only to lift inflation;

- It may be to try and lift the participation rate or labour productivity by stimulating demand at full employment;

- It may be to prevent the risk of insolvency from materialising should the bond bubble burst.”