Frankfurt — Louis Harreau of Credit Agricole CIB may have cracked the code for how the European Central Bank (ECB) will end its quantitative easing programme. It’s contained in a simple equation, which he has dubbed the "new generation" Taylor rule, a reference to a tried-and-tested central bank model for setting interest rates based on how much inflation and growth are deviating from their target rates. His formula goes like this: Monthly net injection from the ECB in billions of euros (QE + TLTROs) = 120 x (1.5 — core inflation). TLTROs are targeted longer-term refinancing operations. How does it work? Harreau observed that before price pressure began to falter in the eurozone in about 2013, the core inflation would average 1.5% a month. So at that level, conventional monetary policy should be enough, he reasons. Harreau then looked closer at three episodes of the ECB’s massive easing programme. Harreau crunched the numbers and came up with an "A factor" that solves the equation f...
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