If there’s a large console at the top of the European Central Bank showing what’s going on across the euro area, then a lot of the lights are green right now.
Green meaning good. Especially in financial markets, supported by rock-bottom interest rates and unprecedented ECB asset purchases, the situation is largely positive. The real economy is also looking fresher, as a gradual recovery is under way. It’s just that the inflation light is still glowing red.
That’s according to a color map devised by Ulrik Bie and Scott Farnham, economists at the Washington-based Institute of International Finance, a global association of the financial industry.
Their dashboard includes 18 selected financial, real economy and inflation variables to monitor the transmission of monetary stimulus through the euro-area economy, and evaluates to what extent monthly movements in each of these categories are in line with the ECB’s objectives.
Policy makers are facing “stubbornly low inflation despite an economic growth outlook that is slightly better than expected,” Bie and Farnham wrote in a note. But “without new forecasts, the case for further action is not yet made.”
On Thursday, ECB President Mario Draghi evaded questions on the future of a 1.7 trillion-euro asset-purchase program that’s currently set to end in March, pointing to the central bank’s December meeting when policy makers will benefit from fresh forecasts and suggestions on how to address bond scarcity. Bie and Farnham predict Draghi will announce an extension of QE until the end of 2017 then.
In any case, Draghi has said that stimulus will continue until inflation shows a sustained return towards the goal of just under two percent. In other words, when the dashboard light goes green.