So the European Central Bank (ECB), QE programme is confirmed. Overnight, President Mario Draghi announced the launch of an open-ended, expanded monthly 60 billion euro (US$70 billion) private and public bond-buying program. However, the programme is open-ended until at least 2016 and could amount to as much as a trillion euros.
The program will start in March this year. The hope is that it will boost the region’s painfully low inflation rate, which came in at an annual minus 0.2 percent in December. Draghi said:
Inflation dynamics have continued to be weaker than expected. While the sharp fall in oil prices over recent months remains the dominant factor driving current headline inflation, the potential for second-round effects on wage and price-setting has increased and could adversely affect medium-term price developments.
This assessment is underpinned by a further fall in market-based measures of inflation expectations over all horizons and the fact that most indicators of actual or expected inflation stand at, or close to, their historical lows. At the same time, economic slack in the euro area remains sizeable and money and credit developments continue to be subdued. Second, while the monetary policy measures adopted between June and September last year resulted in a material improvement in terms of financial market prices, this was not the case for the quantitative results. As a consequence, the prevailing degree of monetary accommodation was insufficient to adequately address heightened risks of too prolonged a period of low inflation. Thus, today the adoption of further balance sheet measures has become warranted to achieve our price stability objective, given that the key ECB interest rates have reached their lower bound.
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. Moreover, today’s decisions will support our forward guidance on the key ECB interest rates and reinforce the fact that there are significant and increasing differences in the monetary policy cycle between major advanced economies. Taken together, these factors should strengthen demand, increase capacity utilisation and support money and credit growth, and thereby contribute to a return of inflation rates towards 2%.
The ECB is joining the U.S. Federal Reserve, Bank of England and Bank of Japan in launching a quantitative easing (QE) scheme.
Looking at the scheme in more detail, the ECB will purchase euro-denominated investment-grade securities only. However, debt that is trading with a negative yield will also be eligible for the program. Draghi also said that in the event of a sovereign restructuring or default, public and private bondholders would be treated on equal terms. Twenty percent of the additional purchases will be subject to risk-sharing arrangements, designed to limit the amount of risk the ECB takes on to its balance books. The majority of risk will remain with euro zone national central banks. No more than 25 percent of each debt issue will be purchased. The maturities of the debt purchases will range between two and 30 years.
It is worth noting that the ECB also announced it would hold its main interest rate unchanged at 0.05 percent, with the rate on its marginal lending facility at 0.30 percent. The rate on its deposit facility was held at -0.20 percent. Yes, that is a negative number, so deposits are attracting a charge!
