This Week's Focus: The ECB bubble
Friday, 09 of September 2016
This week focus
The European Central Bank did not move tab at its meeting on 8 September and kept its interest rates unchanged intervention. The program of asset purchases in the secondary debt markets continue as advertised, at least until March 2017, although its extension is not ruled out in time and in amount.
The objective of monetary policy measures the ECB is to avoid deflation and keep price growth within the line of moderate inflation, ie, at levels not written but close to 2%. Today, inflation in the euro zone is far from these levels, with a meager 0.20% at the end of August.
As recognized by the ECB in its statement, the evolution of prices in the short term will be marked so do energy prices, as other less volatile assets, what is known as core inflation, no symptoms increase. Brent oil prices, so far 2016 has risen by 28%, after falling 35% in 2015.
In the last twelve months, the price remained relatively stable if we look at point to point, but the fall that carried out until the end of January 2016 would have the opposite effect from now on in the CPI. To continue oil prices at current levels, the positive effect on the CPI will increase from October 2016 and will reach its peak in January 2017, where the impact of oil prices would be an increase of about 65 % annually.
The weight of energy in the harmonized CPI is 9.7% and transport services weigh another additional 7%.
Therefore, in the coming months most likely the CPI in the euro zone will tend to rise, unless the oil back down, but not necessarily by an improving economy but a technical detail of how the CPI is calculated.
Doubts about the effectiveness of monetary policy in the economic recovery persist. The first casualty sector is still the financial markets because they do not see clearly how they will improve their profits with negative interest rates and low credit demand.
Without a healthy financial sector, which makes transmitter of monetary policy to the real economy, expanding credit and assigning projects profitable in the medium term investment any monetary experiment like the one carried out by the ECB is doomed to failure. For now, all he has achieved, is that states are more indebted than before the crisis. Draghi seems to live in a bubble, oblivious to reality.