On January 22, the discussions at the meeting of the Governing Council of the European Central Bank will be driven by forecasts of historically low long-term inflation (-0.2 in December 2014).
This cannot be explained solely by the current oil price levels. Long-term inflation expectations are thus calling into question the ECB’s ability to achieve its inflation target (set at 2%).
The European monetary authority has no choice but to take strong action by massively intervening in private and public debt markets to circumvent the currently inoperative banking credit channel and lower public borrowing rates below economic growth expectations.
Time is running out if it wants to avoid the trap of the deflationary spiral: reduction of the wage bill, investment freeze, pressure on suppliers, and stifled demand!
Despite extremely favorable refinancing conditions, the credit activity of banking institutions is insufficient to boost household consumption and corporate investment.
By purchasing securities backed by loans granted to businesses, the ECB makes economic actors solvent who currently present a too high probability of default to be funded by banking institutions. The effectiveness of this action is nevertheless limited by the current narrowness of this market segment.
The massive purchase of sovereign bonds by the ECB could lead to a further decline in public borrowing rates, to a level below that of economic growth.
The level of public indebtedness depends directly on the gap between the borrowing rate and the growth rate. It is therefore essential in a context of distrust regarding the sustainability of public debts that sovereign interest rates are at their lowest possible level.
The success of the ECB’s quantitative easing (QE) is therefore a vital condition for the recovery of Europe’s economy.
