"Quantitative Easing Speed Adjustment"... ECB Diverges from US and UK

Major Countries Expand Tapering Signals... ECB Says "Asset Purchases Maintained"
Concerns Over 'Cliff Effect' Following Stimulus End
Possibility of Expanding Quantitative Easing Programs Pre-COVID-19

European Central Bank (ECB) headquarters in Frankfurt, Germany
[Image source=Reuters News Agency]

[Asia Economy Reporter Kim Suhwan] As the European Central Bank (ECB) emphasizes economic recovery and plans to maintain its asset purchase policy, there is an assessment that the ECB's policy stance could become isolated amid major central banks such as the U.S. Federal Reserve (Fed) and the Bank of England (BOE) successively signaling tightening policies including interest rate hikes.

On the 23rd (local time), Bloomberg reported, "While major central banks such as those of the U.S. and the U.K. are raising voices warning about inflation, the ECB, which is maintaining a large-scale quantitative easing policy, is becoming increasingly isolated."

Earlier, Fed Chair Jerome Powell stated after the Federal Open Market Committee (FOMC) regular meeting that the members agreed to complete a gradual tapering by around mid-next year. In the subsequently released dot plot, 9 out of 18 members expected interest rate hikes next year, up by 2 from 7 members in the June FOMC.

Jerome Powell, Chair of the U.S. Federal Reserve (Fed) [Image source=Reuters Yonhap News]

Along with this, the BOE also indicated the possibility of an interest rate hike by the end of this year at the Monetary Policy Committee (MPC) meeting on the 24th, forecasting inflation to rise above 4.0% in the fourth quarter.

Additionally, just this week, five countries including Pakistan, Hungary, Paraguay, Brazil, and Norway announced interest rate hikes, showing an expanding trend toward tightening.

Meanwhile, the ECB has expressed the position that premature tightening should be avoided as sufficient economic recovery has not yet been achieved.

Currently, the ECB is implementing a bond purchase program worth 1.85 trillion euros (approximately 2550 trillion won) as a stimulus measure for economic recovery during the COVID-19 pandemic. With the scheduled end of purchases in March next year approaching, the ECB is concerned that ending the stimulus could suppress economic rebound.

Accordingly, the ECB is reportedly considering expanding the quantitative easing policy that was in place before the COVID-19 pandemic even after the bond purchase program ends.

On the 22nd, Madis M?ller, ECB Governing Council member and Governor of the Bank of Estonia, said in an interview with Bloomberg, "Expanding the previously implemented quantitative easing program is one of several options," adding, "The decision will be made according to market conditions in the spring of next year."

In particular, some members expressed concerns that ending the ECB's quantitative easing could cause a so-called 'cliff effect,' delivering a sudden shock to the real economy.

Member M?ller warned, "The end of the quantitative easing program carries the risk of causing a cliff effect, especially for highly indebted countries."

Meanwhile, ongoing supply shortages of key components such as raw materials and semiconductors have resulted in the Eurozone (19 countries using the euro) manufacturing sector's recovery falling short of expectations, deepening the ECB's concerns.

[Image source=Reuters Yonhap News]

According to global market research firm IHS Markit on the day, the preliminary composite PMI (Purchasing Managers' Index) for the Eurozone in September was 56.1, falling short of the market forecast of 58.5.

Signs of a slowdown in manufacturing recovery have led to interpretations that the ECB finds it difficult to readily shift toward tightening.

Furthermore, the ECB forecasted that achieving the targeted average inflation rate of 2% will not be easy and dismissed inflation concerns raised by the U.S. and the U.K.

[Image source=Reuters Yonhap News]

As the ECB does not send signals of tightening, there are criticisms that it is moving separately from other central banks.

Neville Hill, Chief Economist at Credit Suisse, said, "The ECB expects the recession issues that existed before the COVID-19 pandemic to continue," and predicted, "It will enter tightening later than the Fed and BOE."

There are also claims that the ECB's stance on maintaining quantitative easing is not significantly different from other countries.

German investment bank Berenberg analyzed, "The Eurozone is not completely going its own way compared to other countries," adding, "Only the pace differs; the direction is the same."

This content was produced with the assistance of AI translation services.