However, not explicitly allowing for the possibility of an extension of the program would set a strong signal to financial markets that the ECB is starting to exit unconventional monetary policy. It can be expected that financial markets would show a strong adverse reaction to such a signal, with important implications for interest rates and asset prices. Given that inflation continues to be far below the 2% target of the ECB, such a signal would have come at the wrong time and seriously jeopardise the probability of returning to price stability, as well as the chances for a wide-spread economic recovery in the euro area.

God wants to punish you, he fulfills your wishes

It is also important to recognise that the old saying may apply that if “God wants to punish you, he fulfills your wishes”. A premature exit from Quantitative Easing (QE) by the ECB would in the short run exacerbate the problems faced by European banks, not alleviate them. It is one absurdity of the situation that those banks currently suffering from the low interest rate policy (and QE) would precisely be those banks that would also most suffer if short term rates suddenly increased. That is due to the fact that loans extended under the low interest environment would not fall due until in a few years while interest rates on deposits would most likely tend to rise immediately, further squeezing margins. Hence, if and once the ECB decides to exit from QE and the low interest environment, this step has to be prepared extremely well in order to avoid significant financial instability. This became obvious when the Fed started its process of exiting from QE late last year.