European QE: Has it been worth the effort?
By David Zahn, head of European Fixed Income, Franklin Templeton Fixed Income Group
Despite unprecedented accommodative monetary policy, including near-record-low interest rates and a massive asset-buying programme, the eurozone’s economy is languishing. Exports are slowing and inflation is hovering below 0%.1 Some observers are now questioning the European Central Bank’s (ECB’s) strategy and asking whether its quantitative easing policy can be effective.
Just over six months into the European Central Bank’s (ECB’s) quantitative easing (QE) programme and nine months after it was officially announced, it is tempting to look at the results and ask whether it has been worth the effort.
Although inflation continues to hover below the 0% mark—significantly below the ECB’s 2% target—and the euro exchange rate is largely unchanged versus the US dollar from six months ago, we think the programme has been important in getting the eurozone back on track.
However, we recognise that further action will likely be required and expect the ECB to announce further accommodative measures, possibly as early as this month’s Governing Council meeting on October 22.
In recent months, Europe has largely been spared much of the volatility afflicting global markets, but it is likely to feel the knock-on effect of sluggish global growth forecasts this year.
As a result, the eurozone export machine for this year and next year likely won’t be as robust as the depreciation of the exchange rate might have led observers to expect. The evidence of that is starting to show through in data such as German export figures for August, which were down 5.2% month-on-month.
We don’t think exports from the eurozone are going to collapse, but we do recognise a slowdown is likely. As a result, we expect the ECB to take further action. However, we think the central bank has done as much as it can on interest rate levels and hold the view that cutting rates further in Europe would not help spur growth and inflation.
Rather, we believe the ECB should be looking to adapt its QE programme to inject liquidity. Specifically, we think the ECB should be looking to extend QE past its current September 2016 deadline.
We consider the other option—increasing the size of purchases per month—would be more problematic both politically and practically. For example, assuming the ECB intends to maintain its policy of buying assets on a pro-rata basis for all countries, it could quickly run out of German government bonds, also known as Bunds, to buy should it increase the monthly purchases.