European Stocks Extend Rally on Extended QE Comments

After several months of dismissing disinflationary trends, the European Central Bank has affirmed that it will do whatever it takes to reach its inflation target.

After prices fell in the Eurozone by 0.1% on a month-to-month and 0.2% on a year-to-year basis, the European Central Bank announced a 1.1 trillion euro asset-purchasing program last week aimed at raising inflation expectations. One day after the announcement, ECB executive board member Benoit Coeure said the quantitative easing program would extend if inflation fails to reach 2%. 

After several months of dismissing disinflationary trends, the European Central Bank has affirmed that it will do whatever it takes to reach its inflation target.

After prices fell in the Eurozone by 0.1% on a month-to-month and 0.2% on a year-to-year basis, the European Central Bank announced a 1.1 trillion euro asset-purchasing program last week aimed at raising inflation expectations. One day after the announcement, ECB executive board member Benoit Coeure said the quantitative easing program would extend if inflation fails to reach 2%. 

“If we haven’t achieved what we want to achieve and I should say what we should achieve, because that’s the mandate of the ECB and it’s in the treaty–which is having a firm perspective that inflation goes back to 2 percent, close to 2 percent but below 2 percent as we say it in the medium term–then we’ll have to do more or we have to do it for longer,” he said at the World Economic Forum in Davos, Switzerland.

Currently, the ECB’s program is set to purchase 60 billion euros of assets monthly, including government bonds, from now until September 2016.

The euro plunged on the move, falling to an 11-year low. Some analysts see the euro trading at parity with the US dollar, after the American currency sees continued strength.

Equity Boost

The ECB decision gave a solid boost to European equities, which rallied broadly on Thursday and Friday of last week. The Deutsche Bourse and French CAC 40 index saw over a 7% gain in a month, as speculation of a broad asset purchasing program drove prices higher.

Some analysts expect a European repeat of U.S. equity valuations in 2013, when the Standard and Poor’s 500 index rose over 30% in a year.  The strength in European stocks did not happen in the U.S., where a quantitative easing program ended last October. The S&P 500 fell nearly 1% in the past month, while the Dow Jones Industrial has fallen further, down over 1.3%. 

Inflation Target

While rising equity prices are an inadvertent consequence of the ECB’s actions, economists are expecting a rise in inflation after December’s deflationary trend.

ECB President Mario Draghi said that the bank would target a 2% inflation rate after the Eurozone saw core prices rise 0.8% in December. Core inflation, which excludes prices on energy, food, alcohol, and tobacco, should rise at a similar pace in 2015. Meanwhile, headline inflation, which includes those items, has been rapidly falling into negative territory, resulting from falling oil prices, which collapsed in the second half of 2014.

While oil prices have not seen similar declines in early 2015, the ECB and many European economists believe that the low oil price will make achieving the Eurozone’s 2% inflation rate next to impossible, prompting a more aggressive monetary policy from the European Union.