Updated 5:12pm
THE EUROPEAN CENTRAL bank has pulled the trigger on a bond-buying programme worth more than €1 trillion bond in a bid to rejuvenate the failing eurozone.
President Mario Draghi made the announcement after the central bank kept interest rates at record lows ahead of the expected launch of the radical money-creation scheme.
He said the ECB would buy government and private-sector bonds worth €60 billion a month until September 2016 – putting the total value of the scheme at about €1.1 trillion.
Draghi said the quantitative-easing programme would start in March and would involve buying investment-grade eurozone bonds on the markets with the aim of lifting inflation back towards the bank’s 2% target.
Here’s a quick summary of some of the programme’s other key points:
Don’t worry about inflation
Draghi hosed down fears the money-creating programme would lead to rampant inflation because of the sudden injection of extra cash into economies, alluding to similar schemes which have been carried out in the US, UK and Japan.
“Have we seen lots of inflation since the (quantitative easing) programmes started, have we seen that?,” he said.
In these (past) three years we have lowered interest rates … and each time someone is saying that this is going to be terribly expansionary and this will lead to inflation. Somehow this runaway inflation hasn’t come yet.”
Spare a thought for the euro
The euro took a sudden dive after the ECB’s announcement and was trading at an 11-year low of $1.14 this afternoon.
Part of the expected effect of the cash-injection programme has been to drive down the euro because of the flood of new money.
Eurozone exports will be more competitive outside the common currency block, but the falling currency also means over 20% of the value of Europeans’ savings have been wiped out over the past year when compared to their US counterparts.
Germany not a fan
Earlier today, the official lending rate was left at the 0.05% level the bank first set in September – seen as the “last throw of the dice” before the ECB was forced to start full-scale quantitative easing.
The EU’s most powerful economy, Germany, has been fighting the move on the grounds it will take the pressure off other countries to get their finances in order.
German Chancellor Angela Merkel, speaking before the ECB’s announcement at the World Economic Forum in Davos, said: “No matter what sort of decision the ECB will take, we should not become diverted from the fact that we as politicians need to put a framework for recovery in place.”
But Berenberg Bank economist Christian Schulz told AFP that Draghi – who famously vowed to do “whatever it takes” to protect the euro – had delivered “once again” when it was needed.
He noted the ECB’s money injection was smaller than the Japanese government’s programme, but larger in proportion to GDP than any US scheme since the height of the financial crisis in 2008.
“The most important channel is the impact on confidence and expectations,” he said.
“An impressive announcement like the one today can boost investors’ and households’ inflation expectations.”
More demand for Irish property
Closer to home, Savills Ireland economist John McCartney said the ECB programme would mean more money going into property and added demand from overseas buyers because of the weaker euro.
“(It) will put further downward pressure on bond yields, forcing investors into higher yielding asset classes, including commercial property,” he said.
Meanwhile, Fine Gael MEP Brian Hayes said the programme didn’t go far enough because of the low level of risk-sharing the ECB was offering.
“Mario Draghi said that only 20% of the asset purchases will be subject to risk-sharing,” he said.
Leaving national central banks to bear the main responsibility for any default that could potentially lead to a dangerous situation in the Eurozone. When the Eurozone is affected by a crisis, there should be a collective and mutualised response.”
With reporting from AFP
- First published 1pm
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