Monetary policy Bond Buying Has Not Boosted Inflation

The European Central Bank has been buying bonds on a large scale for the last year, trying to jump-start inflation, but prices are still falling in the euro zone, despite the cash infusion.
The ECB has spent billions to drive up inflation but with little success.

Exactly one year ago European Central Bank Mario Draghi launched a big experiment. In the last 12 months, the European Central Bank has been spending €60 billion ($66 billion) every month, primarily on the government bonds of euro countries. Mr. Draghi's goal was to jumpstart inflation in the 19-nation euro zone economy.

Based on that goal, the results are disappointing. In February, prices in the euro zone declined by 0.2 percent compared to the same period last year. After initial euphoria, most of the effects of the program have disappeared. February marked the largest decline in prices in a year. As much as this pleases consumers, the central bank is worried. It fears crippling deflation, as prices remain far from the ECB's medium-term goal of keeping inflation at just under 2 percent.

But there are growing doubts over whether the ECB can force this to happen with its massive bond purchases. "Mr. Draghi's hopes are unlikely to come true, even if he starts printing money more rapidly," warned Commerzbank chief economist Jörg Krämer.

Mr. Draghi, on the other hand, remains fully convinced of the effects of his program. In December, he said that without the ECB's massive bond purchases, inflation would have been 0.5 lower in 2015. Now the central bank could even boost the program on Thursday and increase its bond purchases.

But even the markets are no longer as euphoric as they were when the bond purchases began.

The euro has appreciated once again, not just against the dollar, but also compared to the currencies of emerging economies.

When the program was launched 12 months ago, the blue-chip German stock index, the DAX, shot up to more than 11,000 points, while at the same time yields on government bonds and the euro exchange rate plunged. This trend had already begun when Mr. Draghi mentioned the possibility of a bond-buying program in a speech at a meeting of central bankers in Jackson Hole, Wyoming, in August 2014.

The euro exchange rate was even heading toward parity with the U.S. dollar - something the ECB had considered to be a good thing. A lower euro exchange rate increases the cost of imports to the euro zone, which supports inflation. At the same time, exports from the euro zone to other countries become cheaper and therefore more competitive, which helps the economy.

But these initial effects did not last. The euro has appreciated once again, not just against the dollar, but also compared to the currencies of emerging economies. The DAX is now about 15 percent below its level a year ago. And interest rates for government bonds are approaching their all-time lows, mainly because many investors are more pessimistic about economic development.

The only bright spot at the moment is lending. After a prolonged decline in past years, banks in the euro zone have been issuing more loans to private households and companies since May 2015. "The credit cycle has turned," said Holder Schmieding, chief economist at Berenberg Bank.

Unlike many of his counterparts, Mr. Schmieding has not lost faith in the impact of the bond purchases. He attributes the unexpectedly low inflation primarily to the sharp decline in oil prices in the last few months. He assumes that the European Central Bank will add fresh monetary policy measures on Thursday to achieve its 2-percent inflation goal.

Critics, on the other hand, see it as an act of desperation by Mr. Draghi and his counterparts.


Jan Mallien covers monetary policy for Handelsblatt out of Frankfurt. To contact: [email protected]