Of all the details of the European Central Bank’s (ECB’s) quantitative easing programme announced today, the commitment to continue asset purchases until inflation moves back towards the central bank’s 2% target was one of the most important.
The ECB announced plans to launch an asset purchase programme (QE) across the eurozone amounting to €60 billion a month from March 2015 (although this includes around €10 billion a month as part of its existing asset-backed securities and covered bonds programmes). Although the scale of the programme itself was impressive, another part of the announcement also exceeded expectations.
Here’s the key passage from Draghi’s introductory statement:
That is, although the ECB intends to wind-up its programme in September 2016 it is not required to do so unless inflation has moved back towards the central bank’s inflation target of “below, but close to, 2%”. This means, in effect, that Draghi is providing an open-ended commitment to raising demand in the eurozone sufficiently to start pushing up the rate of price increases.
Prior to the announcement there were concerns that the programme would be time limited meaning that the ECB would have had to halt purchases at some arbitrary point irrespective of underlying conditions. This would not only have risked it ending prematurely (if inflation was still substantially below target, for example), but would also have imposed a de facto cap on the amount that the central bank was willing to spend.
That risk, at least, has been avoided.