At near zero inflation, ECB may expand QE program

By MoneyTimes

Sep 17, 2015 02:56 AM EDT

European Central Bank may expand quantitative easing program as the inflation is hovering at near zero level of 01. percent for August. ECB Vice-President also indicated that QE program may be widened further. 

With inflation rate in the Eurozone reaching 0.1 percent in August as against the forecast of 0.2 percent, economists predict that European Central Bank (ECB) may ease quantitative program. The core inflation is stable at 0.9 percent, according to the latest data. The expectations about quantitative easing program (QE) further widened after the ECB Vice-President Vitor Constancio indicating the possibility of expanding Frankfurt-headquartered ECB's asset purchase program. The latest Bloomberg's survey involving 41 economists indicates there would be expanding of QE. Over 67 percent of economists took part in the survey opined that the Frankfurt-headquartered ECB will expand quantitative easing program now or before its expiration in September 2016.

The expectations and calculations about the Quantitative Easing program were making rounds, but those were premature, said economists. The latest data shows that growth and inflation are not that bad as it hasn't significantly eased. 

Hence, it's not that enough bad to prompt ECB to respond. Though, there would be small changes to the QE program. Moreover, as economists view, expanding QE require the fact that ECB should admit that its earlier measures didn't give the desired result. 

The decline of inflation rate across the Eurozone could prompt ECB to expand a massive bond-buying program to overcome economic risks involved with the weaker prices, predict economists. European official statistical office 'EuroStat' data revealed that inflation rate was 0.2 percent in July and eased to 0.1 percent in August.

ECB launched the bond-buying program in March. The central bank has been buying euro 60billion every month in public and private debt securities, mostly government bonds. The central bank is likely to continue bond buying program till its target of September 2016. 

There were indications from ECB that its bond-buying program may continue after September 2016 also. This move becomes necessary if inflation doesn't reach to ECB's medium-term target. 

The data released on 16 September further gives wider scope that ECB may opt for quantitative easing program expanding. Lower oil prices also led European Central Bank to cut its forecast on inflation. Inflation in all the euro-denominated 19 countries is subdued. European Central Bank forecasts a gradual rise in inflation to 1.7 percent by 2017 from the current 0.1 percent. 

Mario Draghi, President, ECB, has recently made a caution that limits of QE and monetary policy would call for a quantum jump in Eurozone integration. This structure may actually lead to a real solution in the ongoing crisis. 

The governing council of ECB is showing its concerns on the slowdown in foreign trade as it's impacting the exports. Considering the current economic challenges, ECB will expand euro 1.14 trillion quantitative easing program. ECB is expected to do this in the next nine months.

ECB may also facilitate banks in lending to companies and households. As part of this, the fifth round of long term loans to bank will take off next week. Economists further predict that banks may opt for euro 70billion when compared to euro 73.8bn borrowed in June. With the benchmark interest rate of 0.05 percent, these loans become due in September 2018. 

The agreement to QE launch was part of the agreement as every member of Eurozone should contribute towards the resolving the problem. In this context, economists hold the view that Eurozone needs to take some crucial decisions about deeper integration.

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