Eurozone deflation ruins quantitative easing's first birthday

Chris Papadopoullos
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Annual price growth in the Eurozone dropped to back into negative territory in February, official figures confirmed this morning.

Inflation as measured by the harmonised index of consumer prices (HICP) was minus 0.2 per cent in February, according to EU statistical office Eurostat. The data confirms an earlier estimate and shows inflation has deviated further from its two per cent target.

The latest foray into falling prices ends a four-month run of positive annual price growth. It was led by an 8.1 per cent drop in energy prices, a sharper fall than January's 5.4 per cent. However, food, alcohol and tobacco prices also rose at a slower rate, as did services prices.

This month marks one year since the European Central Bank president Mario Draghi launched its so-called quantitative easing (QE) programme. Draghi has earned the moniker "Super Mario" for his ability to pull off big policy surprises despite known European opposition.

It involves the central bank buying €60bn a month of mostly government debt to raise asset prices, ease credit conditions, and increase the amount of money in the Eurozone. Some economists also have a sneaky suspicion it is aimed a weakening the euro. The programme was recently upgraded to €80bn a month.

Economists are split on the effectiveness of QE.

“We think monetary policy has long reached its limits in terms of boosting the economy. Additional measures have a very small marginal benefit as the short experience of Eurozone QE has proven,” said Danae Kyriakopoulou from the Centre for Economics and Business Research.

The idea that central banks have run out of ammo is “bunkum”, according to Tim Congdon, chairman of the Institute of International Monetary Research at the University of Buckingham.

“In my view it is not at all clear that the ECB needed to do anything more. Draghi’s announcement on 10th March, with its addition of €20b-a-month to the earlier €60bn-a-month dosage, may eventually be deemed overkill,” he said.

“Monetary policy is characterized by long and variable lags, and it will take another year or two before the full impact on macroeconomic outcomes is evident.”