Pressure is building on the European Central Bank (ECB) to bring Quantitative Easing (QE) to an end – with one of the eurozone’s most prominent bankers today adding to the calls.
In an attempt to stimulate demand in the single currency area, the ECB began buying assets in March 2015 at the rate of €60bn per month, paying for it with newly-created electronic money.
It raised its purchases to €80bn per month in March last year before bringing the figure back down to €60bn in March this year.
At the time the ECB’s president, Mario Draghi, pledged to continue the programme until the end of 2017.
However, with the eurozone now enjoying solid growth in most countries and the ECB having bought more than €2tn worth of assets, there are growing calls for the programme to be wound up early on the grounds that the job has been done.
Unsurprisingly, the place from which these calls are most vocal is Germany, the country that has always been most sceptical about QE.
Jens Weidmann, the president of the Bundesbank, Germany’s central bank, told a newspaper three weeks ago that there was a case for a “quick and orderly exit” from the ECB’s asset purchases.
And today John Cryan, the chief executive of Deutsche Bank, the country’s most powerful lender, added to the calls.
British-born Mr Cryan told a banking conference in Frankfurt: “The era of cheap money in Europe should come to an end – despite the strong euro.
“We are now seeing signs of bubbles in more and more parts of the capital market.”
In speaking out, Mr Cryan has articulated the main objection that many people have to QE, both in the eurozone but also in the kind of asset purchase schemes carried out by the US Federal Reserve and the Bank of England.
This is that, by pumping the system full of cheap money, central banks have created bubbles in asset prices – whether those be in shares, bonds, or houses.
These bubbles have tended to benefit the ‘haves’ rather than the ‘have nots’ and, in the process, are seen as having exacerbated the generational divide.
There are also concerns that QE has caused a mispricing of risk – in other words, lenders have provided finance to investment projects more cheaply than they might otherwise have done, one of the causes of the last financial crisis.
For bankers in the euro area, the ECB’s policies have created a particular headache, because – with negative interest rates – it charges banks to deposit money with it.
The problem that Mr Draghi has is that the euro is the best-performing currency this year, partly due to the stronger growth in the eurozone this year, markets are starting to price in a rate rise.
Ironically, though, every 10% rise in the value of the euro against a basket of currencies feeds through to a drop in eurozone inflation of between 0.4-0.5 percentage points. It is one reason why eurozone inflation is languishing at 1.5% and way below the 2% that the ECB targets.
If Mr Draghi and his colleagues were to bring their asset purchases to a premature end, let alone raise interest rates, it would simply send the euro higher still and make their job even harder.
Investors will be watching the ECB’s latest policy meeting on Thursday for signs that the bank is edging towards bringing its purchases to an end.
The chances are that, with the euro marching ever higher, they may have to wait a little longer.