The European Central Bank formalized at this week’s meeting the shift in monetary policy stance. Something as straightforward as anticipating that normalization of the extreme expansionary measures applied during the crisis will begin in the future. The complexity lies in the details: how and when this process will be carried out.
Financial fragmentation in an environment of economic imbalances was the key argument of the monetary authority in managing its policy during the crisis. Traditional measures with zero official interest rates and high liquidity injection, accompanied by unconventional ones through debt purchases in the market. With the crisis overcome and financial stability achieved, the goal now is to reverse part of these measures, thereby avoiding new imbalances and distortions from their prolongation over time.
A strategy proposal was unanimously adopted at the meeting that involves ending debt purchases this year and beginning interest rate increases in the second half of 2019. A tentative proposal, conditional on data developments. And especially on inflation behavior, which shows signs of convergence toward the medium-term target level of 2.0%. The central objective of monetary policy in the eurozone is inflation.
We must not confuse prudence in the announced monetary normalization process with ambiguity. The communication shows that the official decision is clear, thereby confirming market expectations. Monetary normalization will avoid potential risks while reinforcing the optimism with which the future is viewed.
