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Home / Analytics / Forex analysis & forecasts / Forex Fundamental analysis / The purposeful ECB. Fundamental analysis for 14.03.2016
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The purposeful ECB. Fundamental analysis for 14.03.2016

For the second year in a row, the ECB and other regulators have been trying to stick to the target of the inflation of 2%. What is more, the longer this story continues, the more extensive the measures taken to stimulate the economy are becoming. If several years ago Mario Draghi, the head of the ECB, didn’t want to hear anything about the European version of QE, then right now the volume of the program is increasing, and the list of the assets was even expanded during the last meeting by adding corporate bonds to it.

Considering that the ECB has taken quite a lot of measures to make the program even easier, one can think that the regulator is almost out of “weapons”. However, it’s not what it seems, because the ECB can increase the QE volumes without giving up its attempts to put the inflation back to 2%. And this poses quite a logical question: why is this particular inflation rate is so important for the regulators?

The fact is that significant decreases of the key rates far below zero is impossible in the first place, because people will hardly pay for keeping of assets on their deposits and the amount of cash savings (at home, under the “matress”) will rise. Consequently, Central Banks are in the need of the minimum inflation, one of the reasons is that they want the economic effect to be the same when the rate is decreased up to zero during some crisis as if the rate was negative.

In other words, the effect from the rates, which are close to zero, directly depends on the inflation rate. At the same time, there are several other factors, which force monetary authorities distance from inflation at zero: deflation risks, increasing cost of servicing on the government debt, overall stagnation of economy, and some others. And also, all these factors, if they appear, reinforce each other’s negative influence on the economy.

We should note that there is no agreement among economists regarding which inflation rate may be considered as acceptable. Some say that the target of the regulators should be lower than 2% because of the globalization and ageing of population. Other economists, including the ones from the International Monetary Fund, appeal to increase the inflation up to 4% in order to provide the Central Banks with more opportunities during the crisis. However, relative success of the FRS and the rise in inflation up to 1,3% in the USA will hardly let the ECB to take the wrong turning.

Consequently, the policies of the ECB and FRS may become even more different. And on the way of the European inflation rate to this infamous number of 2%, Mario Draghi may yet increase the volume of QE, and more than once. If in this case the FRS will stick to its policy to increase the rate gradually, the Eurodollar may get the impulse from both regulators in the same direction. This is why the chances to update last year’s lows are extremely high.
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