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Is easy money regime coming to an end?

Is easy money regime coming to an end?

By Shubhra Agrawal

According to the results of latest surveys of business intentions, the Eurozone economy has been growing rapidly and it is rumoured that several European Central Bank policymakers have now decided to curb the easy money regime.

What determines the growth rate?

Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. It is determined based on five major elements: new orders, inventory levels, production, supplier deliveries and the employment environment. The Flash Composite PMI released by the IHS Markit reached a six-year high this month. The indicator is often seen as an influential guide to buying plans for businesses and hence, indirectly as a measure of growth. It climbed to 56.7 from February’s 56.0. This has been its highest reading since April 2011 and better than any predictions in a Reuters poll.

Germany and France share the same currency and are two of the largest economies. They registered six-year highs as well, surpassing expectations. Experts believe that there has been overall economic growth, with a sturdy growth rate overall.

What is the easy money policy?

In accordance with the easy money policy, the central banks lower interest rates to make more money flow in the market and hence, increase the liquidity. This establishes easier access to money and in turn, people tend to invest more. This not only stimulates the economy but also increases the employment rate in the country.

ECB’s expected course of action

There would be increased pressure on ECB to change its easy monetary policy, including negligible interest rates. ECB has always maintained zero or negative interest rates to a large extent. Now, they would also look towards modifying its large asset-buying program.

The primary concern of the ECB would be to control the inflation. The prices being charged by businesses have risen to a six-year high. The inflation rate has remained approximately around 2.0 percent, matching ECB’s target.

What would be the pullback’s effect?

A pull-back from the easy money regime would lead to an increase in the interest rates. This, in turn, would directly affect the upcoming French presidential election that is to be held in the month of April. While Emmanuel Macron and François Fillon are both calling for economic reform, National Front candidate Marine Le Pen will be expecting those angry with the economic conditions to get behind her.

Due to a large demand for manufacturing goods from countries like the United States, China, Britain and the Middle East, Germany’s PMI has risen. The country’s manufacturing index increased from 56.1 to 57. The increased manufacturing would certainly contribute to strengthening Germany’s economy.

However, when France sneezes, the rest of the Europe catches a cold. The Eurozone has always been one of the major economic centres in the world. Greece faulting its loan and Brexit had huge implications on the Euro and the after-effects of the two events were felt across the globe. Nonetheless, there is assurance that the ECB’s approach to managing its economic policy would affect trade implications worldwide. How the European Central Bank plans to convert the effervescent growth into a long-term sustainable growth rate will certainly be something to watch out for.

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