Divided they stand...
The ECB is more divided than ever on the 'new' direction of QE policies announced earlier this month, as its severely restricted 'political mandate' comes hard against the reality of VUCA environment the euro area is facing, with:
- Reduced forward growth forecasts (net positive uncertainty factor for QE)
- Anaemic inflation expectations (net positive risk factor for QE), but reduced expectations as to the effectiveness of the QE measures in their ability to lift these expectations (net negative uncertainty factor)
- Low unemployment and long duration of the current recovery period (net negative uncertainty factor for QE)
- Relative strength of the euro, as per chart below, going into QE (net positive risk factor for QE)
- Related to (5), deteriorating global growth and trade outlooks, with the euro area being a beneficiary of the Trump Trade Wars so far (ambiguous support for QE)
- Expectations concerning the Fed, Bank of Japan, Bank of England etc policy directions (a complexity factor in favour of QE), and
- Expectations concerning the potential impact of Brexit on euro area economy (another complexity factor supporting QE).
Here is a chart showing exchange rate evolution for the euro area, and key QE programs timings (higher values denote stronger euro):
Meanwhile, for the measures of monetary policy effectiveness (lack thereof) see upcoming analysis of the forward forecasts for euro area growth on this blog in relation to Eurocoin data.