At its 8 December Governing Council meeting, the European Central Bank (ECB) extended its asset purchase program by nine months to the end of December 2017, but at a rate of €60 billion per month – a decrease from €80 billion currently.
So did the ECB taper or not?
PIMCO thinks it did. The ECB chose to purchase an additional €540 billion of assets, which exceeds the €480 billion stock implied by a six-month extension at €80 billion per month (what the markets were expecting). However, it will do so at a lower monthly run rate – and at face value, that is tapering.
Yet the ECB’s decision was more nuanced than that. The bank said it “intends to increase the programme in terms of size and/or duration” if conditions deteriorate. Moreover, it remains open-ended in that the ECB has committed to keep it in place until at least the end of next year – “or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.” Which raises the question, what exactly is the target?
A new inflation goal?
The ECB’s inflation target is not straightforward. Officially, it doesn’t even have one, but rather defines price stability as the rate of HICP (Harmonised Index of Consumer Prices) inflation that is “below, but close to, 2%.” The ECB forecasts HICP inflation to be 1.3% next year, 1.5% in 2018 and 1.7% in 2019. That’s an average of 1.5%, after what is set to be just 0.2% this year. So is 1% inflation replacing the previous “just below 2%” target?
PIMCO interprets the ECB’s decision to lower the asset purchase rate as acknowledgement that 2% is an ambitious inflation target to achieve, at least via the blunt tool of bond purchases.
