ECB game on - inflation without delay

“It is essential to bring back inflation to target and without delay”, Mario Draghi, president of the ECB, said in a speech in Frankfurt on Friday.

This comment is the opening salvo for what will be the ultimate monetary battle between money suppliers and money demanders. 

In an effort to raise inflation rates, the ECB will do whatever it can on the supply-side. This means some further form of enhanced ECB quantitative easing. This will not be easy given the restrictions on what can be purchased by the central bank. They believe their job is to flood the market with money as much as possible to push inflation and inflationary expectations higher. 

However, the demand for money or more precisely the demand for credit is not present in the financial system. Money multipliers are down and excess reserves have been building. The demand for money is not strong. Put simply, the central bank wants to increase their balance sheet and force more money into the banking system under the hopes that at some point credit will be expanded and the money will be used to increase economy growth. This activity, in turn, should increase inflation. Another way to get credit and economic demand to increase is through changing inflationary expectations. If inflation expectations increase, consumers may increase aggregate demand today instead of delaying. The ECB objective is to bring inflation expectations back to target in order to get changes in consumption behavior.

Draghi's comments are not bold because the means of action are not clear, but it is game-on. Let's see if they can sway the market and money demand.