-Guntram Wolff, director of the Bruegel institute
Analysts are now predicting the central bank will cut both the refinancing rate and deposit rate during June's meeting. However, there are several arguments why the central bank should replace its current lending programme with the U.S-style quantitative easing. European banks repay their loans from the Long-Term Refinancing Operations, hence, the ECB's balance sheets are shrinking. Purchases of the short-term government debt would help to achieve the inflation target, would also keep the monetary policy separate from the ECB's bank supervisor's role and will create an exit strategy from unconventional policy.
One of the biggest arguments in favour of the QE is constantly falling bank lending. Loan demand usually lags the cycle, with real GDP still being 2.7% below the pre-crisis levels. It is only the first year of recovery and will take time for loan demand to revive. Additionally, weak demand for credit has been accompanied by constrained bank credit supply. Europe's economic growth in aggregate demand is too weak to provide healthier growth and higher inflation. Keeping in mind shrinking balance sheets and the fact monetary policy is effectively getting tighter, a well-designed QE that is aimed at enhancing liquidity and will stimulate aggregate demand, and looks very consistent with the central bank's 2% long-run inflation target.
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