So, ECB QE surprised a little. 60bn per month, not 50. A re-emphasis of the determination to buy private sector assets too. Most importantly, stressing that the purchases were open-ended, to be continued until there was a sustained improvement in the inflation outlook, and ‘at least’ until September 2016. So no preliminary cap on QE as previously guessed.
This open-ended nature of the program, which mirrors QE3 in the US, would, however, be more compelling if the Governing Council did not have the fuzzy asymmetric target it ‘clarified’ for itself from the Treaty-given price stability mandate. That stipulates that the ECB shall aim for inflation ‘close to, but below’ 2 per cent.
This has always been a problem with the ECB monetary framework. Unjustified in theory: if anything, because of the zero bound, undershoots to be avoided more strenuously than overshoots. And injects a lack of clarity in practice that has no obvious benefit. Other than it being something the previous German GC incumbents could agree on, that sounded tough, and somehow differentiated themselves from weak-kneed inflation targeters around the world.
I had guessed optimistically that with new leadership, and inflation being anyway not even ‘close to’ target, the asymmetric words did not make much difference to anything.
But now I think it could be important. Because the ambiguity in ‘close to but below’ makes it unclear just when otherwise open-ended QE purchases would be stopped. Is 1 per cent ‘close to but below’? If it is, headline inflation could justify enough members on the GC mounting an argument for curtailment much sooner than if ‘close to’ means ‘within 0.3 percentage points’.
To increase the force of the promise for open-ended purchases, therefore, and to help ex-post accountability, it would be better to get rid of the ‘close to but below’ and simply re-‘clarify’ to make the target 2 per cent. (Of course, preferably, at some point this would be raised further, to something like 4, to avoid another quick revisit of the zero bound, but there is no hope of that.)