The European Central Bank calls for patience in beginning monetary normalisation and prudence in assessing the objectives achieved during the recovery of the economy and inflation. It also suggests persistence in the current monetary policy, as it believes that a high level of monetary expansion must still be maintained. However, it should be determined whether all these recommendations are consistent with the inertia regarding the exceptional measures applied during the international financial and economic crisis. Is the current situation worrying enough to maintain such risky extraordinary measures? The main threat of these measures lies in their distorting role in the functioning of markets and for credit institutions.
The ECB officially pursues an objective of stable inflation, close to but below 2%. And the conditions to achieve it are now in place. The European economy is growing close to its potential level, unemployment has fallen sharply, and financing conditions are the most favourable from a historical perspective. It is only a matter of time before inflation recovers, as the monetary authority expects. Until then, the ECB is inclined to wait and confirm the theory that inflation is a monetary phenomenon. Although the success of monetary policy always lies in the credibility of its implementation and its preventive nature, this decision to “wait until it is confirmed” implicitly entails a lack of confidence and uncertainty that could spread to economic agents.
In the above reasoning, you will probably miss any reference to financial stability, which many identify with market behaviour. Over the past decade, European authorities have encouraged the diversification of funding sources, especially for companies. Measures such as QE (Quantitative Easing) or the negative ECB deposit rate, which penalises banks, have fuelled strong demand for medium- and long-term paper at ever-lower nominal interest rates, down to almost zero or even negative levels. At the same time, European banks have become stronger and more resilient.
