Financial markets have been adjusting to the high likelihood of another aggressive round of unconventional monetary easing by the ECB on 3 December. This will complete a remarkable metamorphosis by a central bank that has traditionally been viewed as the most conservative in the developed economies, with the possible exception of the Swiss National Bank.
Mario Draghi’s official case for extra monetary easing is straightforward. Although the Eurozone economy has performed broadly as expected in recent months, the Governing Council has decided that “downside risks” to growth and inflation have increased, largely due to events in China. As a result, it may take longer to restore inflation to the target of “close to” 2 percent, and there is a greater danger of inflation expectations breaking lower in the meantime.
This may make sense, but there is little hard evidence that these risks are actually becoming reality. Activity growth in the Eurozone has recently increased to over 2 per cent, and core inflation is rising slightly. If the situation is bad today, it was even worse a few months ago. Read more