ECB Wades Into Currency Wars But Needs Reform Backing
The European Central Bank spent a long time being a noncombatant in the global currency wars. But it has decisively entered the fray as it seeks to boost its balance sheet by €1 trillion ($1.294 trillion) through fresh loans and securities purchases.
The strength of the euro has bedeviled the eurozone, weighing on inflation and complicating efforts of crisis-hit nations to rebalance their economies. But now the tide has turned.
A weaker euro should help push inflation higher from its current low of just 0.3%, far adrift of the ECB’s target of below but close to 2%. Indeed, the ECB’s staff forecasts of inflation of just 1.1% in 2015 and 1.4% in 2016 are based on an exchange rate for the euro of $1.34.
The ECB’s big push comes at a potentially propitious time. The Federal Reserve is winding down its own bond-buying program and preparing markets for what could be increases in short-term interest rates in mid-2015.
Even so, ECB President Mario Draghi is taking some big gambles. The ECB is building a monetary bridge to higher growth and inflation. It is up to eurozone politicians to cross it.
Source: wsj
