The Eurozone’s reflation strategy: getting there, but gradually

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Nicolas Doisy, from the Strategy and Economic Research team at Amundi, comments last developments on ECB’s quantitative easing.

Last week, the ECB gave further details on its Quantitative Easing for the EuroZone (QE-Z) and expressed its optimism in a new set of more upbeat forecasts in 2016-17.

While he confirmed the amount of assets to be purchased (of which notionally €850 bn in government bonds), M. Draghi indicated the ECB would not buy bonds with yields below -0.2%, implicitly confirming a focus on long maturities.

Meanwhile, it was also confirmed that the eligibility of Greece to ECB financing was conditional on the coming Greek commitments.

While the new round of ECB inflation forecasts sees some worsening in 2015, compared to the previous scenario, it also anticipates a faster normalization thereafter. Indeed, while the inflation forecast for 2015 was cut to 0% (a very symbolic figure in that it does not come with a minus sign), prices are seen accelerating even more in 2016-17, at 1.6% and 1.8% respectively.

Consistent with these projections, the ECB has also raised by a bit its growth forecasts over the next three years, quite likely to convey a sense of optimism.

Meanwhile, fiscal policy is becoming more supportive, as the European Commission confirmed its leniency regarding the pace of fiscal adjustment, thus slowing austerity. Indeed, France was granted another two-year delay to finally reach its fiscal targets, in particular those with respect to fiscal deficit.

As unfair as this may look with respect to the other members of the Eurozone, this measure makes a lot of sense, as the pursuit of the austerity drive was likely to dampen the reflationary impact of the ECB’s QE-Z.

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