• ECB to begin QE stimulus program


    FRANKFURT: The European Central Bank (ECB) on Monday is set to begin its long-awaited 1.1 trillion euro ($1.2 trillion) quantitative easing program to stimulate growth and ward off deflation across the eurozone.

    The program calls for the eurozone central bank to buy around 60 billion euros of public and private bonds each month — a policy it will apply until at least September 2016.

    The move comes as traditional efforts to boost sluggish economic activity in the 19-nation eurozone have been exhausted through rate cuts that have brought borrowing costs to nearly zero.

    The policy known as quantitative easing or QE is also being adopted as the eurozone faces a growing risk of deflation, which can lead consumers to put off purchases in the expectation that prices will drop further.

    This can in turn put the brakes on production and job creation.

    The strategy behind the ECB’s QE program is similar to that of earlier schemes introduced by the US Federal Reserve and the Bank of England to pump money into the economy with massive purchases of government bonds, aiming to foster easier credit and spur economic activity.

    Under QE, a central bank creates money electronically and uses it to buy the debt that countries issue to pay their bills. That pushes down interest rates on bonds and other financial assets, making it cheaper for companies to borrow and invest, increasing spending and employment.

    But some observers warn that US and British successes with QE do not make it a surefire remedy for Europe.

    “[We] doubt very much that the new policy will prompt a meaningful economic recovery or counter the threat of deflation as the ECB hopes,” said a recent weekly report by Capital Economics.

    “There is still a large degree of slack in the labor market despite recent falls in the number of unemployed, and the business surveys remain consistent with only weak growth, raising the chances of a sustained bout of deflation.”

    ECB President Mario Draghi has dismissed such doubts, and noted when announcing the QE launch date last Thursday that markets have already reacted with some optimism to the prospect of QE in Europe.

    “We have already seen a significant number of positive effects from these monetary policy decisions,” he said.

    Draghi’s confidence was backed up by an upward revision of the ECB’s growth forecasts, which now see the area-wide economy expanding by 1.5 percent this year, 1.9 percent in 2016 and 2.1 percent in 2017.

    The ECB chief has similarly waved off concerns that private banks facing increasingly stiff post-crisis capital requirements may not want to part with bonds the ECB will need in huge quantities come Monday.

    Draghi noted that those same banks did not hesitate to sell bonds that were on their books when the Fed and BoE rolled out QE policies whose success the ECB and entire eurozone now need to replicate.



    Please follow our commenting guidelines.

    Comments are closed.