On June 6, 2014 the ECB crossed the Monetary Rubicon as it announced another important change in its monetary policy. The central bank is finally willing to use its balance sheet more explicitly to achieve price stability. Next to discussing the details of the ECB’s latest move, Willem Verhagen, Senior Economist of ING Investment Management, also looks at the bigger picture in this MindScope.

## Some are disinflating more than others

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## Forceful monetary policy action is warranted

At first sight it may seem strange that the ECB eases policy further at a time when the economy is clearly on a recovering trend. Yet,  one must bear in mind that the recovery is mostly driven by the fact that the two big drags on growth in 2011 and 2012 are now waning in strength: The pace of fiscal tightening is coming down rapidly and the monetary firebreaks have supported peripheral financial conditions and credit supply as well as general confidence throughout the region.

All this has pushed growth up from an around -1% year-on-year pace to a pace that will probably settle around/slightly above the potential growth rate (which we estimate at 1.3%).  
However, it is very unlikely that the private sector will sustainably push growth above this rate of its own accord because the region is still saddled with substantial imbalances in the form of private sector balance sheet problems and a lack of (French and Italian) competitiveness. This implies that the very substantial degree of slack will only be eroded at a very small pace because of which domestic inflationary pressures will remain largely dormant.

As a result, there is a very big risk that the current very low rates of inflation will “get baked into the economic cake” when they drag inflation expectations down. The early stages of this detrimental process are already visible and this calls for forceful monetary policy action.