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ECB commits to trillion-euro QE

Latest exercise will see ECB buy 60b euros of bonds a month from March until September 2016
Friday, January 23, 2015 - 05:50

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The European Central Bank (ECB) has embarked on more than expected quantitative easing and will purchase 60 billion euros of government and private sector bonds each month until September 2016.

London

THE European Central Bank (ECB) has embarked on more than expected quantitative easing and will purchase 60 billion euros of government and private sector bonds each month until September 2016.

The buying will begin in March, so if an inflation target of 2 per cent is not reached until September, it will total over a trillion euros. This compares with previous market consensus expectations of 550 billion to one trillion euros.

ECB president Mario Draghi said that the ECB would purchase a maximum of 25 per cent of member nations' new issue of bonds. The ECB also reduced the cost of its long-term loans to banks.

The ECB "decided to launch an expanded asset programme encompassing the existing purchase programmes of ABS and covered bonds," Mr Draghi said. "We see sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates close to but below 2 per cent. We believe that the measures will be effective and also raise inflation expectations."

He added that banks would be able to substitute bonds for cash and have more money to lend to the private sector. The initial response was  a decline in the euro and a further increase in European equity prices.

"What monetary policy can do," said Mr Draghi, "is to create the basis for growth, but confidence is needed and it is up to governments to implement structural reforms and growth-friendly fiscal consolidation."

This, combined with "very expansionary" monetary policy, would help improve growth.

"There was a need to act now, there was no need to vote on the measure. There was also concensus to share the risk. Our mandate is price stability and to reach 2 per cent."  

The QE is aimed at strengthening demand, credit growth and stimulation that will raise inflation to the target 2 per cent, he said.

According to Eurostat, the eurozone is in deflation because of the slide in oil and food prices, he added. "Such low inflation rates are unavoidable in short term."

To boost investment productivity, other measures are needed such as labour reforms and measures to improve business climate, Mr Draghi told a press conference in Frankfurt.

"Looking ahead, today's measures will decisively underpin the firm anchoring of medium to long-term inflation expectations. The sizeable increase in our balance sheet will further ease the monetary policy stance. In particular, financing conditions for firms and households in the euro area will continue to improve."

 Real GDP in the euro area rose by only 0.2 per cent, quarter on quarter, in the third quarter of 2014. The latest data and survey evidence point to continued moderate growth at the turn of the year. Looking ahead, recent declines in oil prices have strengthened the basis for the economic recovery to gain momentum, he added.

Lower oil prices and easier money should support households' real disposable income and corporate profitability, he added.  However, the euro area recovery is likely to continue to be dampened by high unemployment, sizeable unutilised capacity and high debt of individuals and corporations.

According to Eurostat, euro area annual HICP inflation was minus-0.2 per cent in December 2014, after 0.3 per cent in November.

Earlier, the  ECB announced that it was holding its main "refinancing" rate steady at 0.05 per cent, and its two other rates - the marginal lending and the deposit rates - at 0.3 per cent and minus-0.2 percent respectively.

Jim Yong Kim, World Bank president and 2015 WEF co-chair, said in Davos that he welcomed the prospect of quantitative easing in Europe, but added that it should not encourage countries to slow down structural and economic reforms.

Jaime Caruana, general manager at Bank For International Settlements, added that financial markets were far too dependent on monetary policies or government intervention in markets.

"Financial markets need to consider more scenarios; be prepared for normalisation," he said in Davos. "It is a mistake for markets to think only one way. Volatility is normal."

Ray Dalio, who heads Bridgewater Associates, a hedge fund firm, said that he was worried that central banks are now out of ammunition and that there was a risk of downside in the future.

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