Discuss the likely success of the ECB’s quantitative easing programme in moving Eurozone inflation closer to ‘the central bank’s ceiling of 2%’
Edexcel A-Level Economics Paper 2 June 2017 Extract
Discuss the likely success of the ECB’s quantitative easing programme in moving Eurozone inflation closer to ‘the central bank’s ceiling of 2%’ (Extract A, line 17). (12 marks)
Quantitative easing is likely to help increase the inflation rate if traditional monetary policy was not successful on its own. This involves the central bank creating money electronically, which is then used to buy bonds from high street banks. This provides the central bank with more liquidity, which incentivises them to pass on lower high street interest rates to consumers. Lower high street interest rates mean that consumers can benefit from a lower cost of borrowing, which encourages higher consumer spending, which is a component of aggregate demand. The diagram below shows an increase in aggregate demand, which causes economic growth to increase, as well as demand-pull inflationary pressure from pl1 to pl2 closer towards the 2% 'ceiling'.
However, if traditional monetary policy has failed to stimulate higher lending, there is a chance that quantitative easing alone may not be enough to stimulate enough economic growth especially after a recession, therefore alternative approaches like expansionary fiscal policy are more likely to be successful. The president of the ECB mentioned that "to reap the full benefits from our monetary policy measures, other policy areas must contribute decisively". Spending cuts and tax hikes can severely reduce disposable incomes and consumer confidence, which can slow growth. Quantitative easing alone may not be able to influence a strong recovery.
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