Wednesday

23rd Oct 2019

ECB unveils €1.1 trillion stimulus

  • Draghi in Frankfurt on Thursday (Photo: ecb.europa.eu)

The European Central Bank will plough €1.1 trillion into the eurozone economy in a last-ditch attempt to breath life into the European economy.

At its monthly governing council on Thursday (January 22), the bank’s governing council agreed to start buying up to €60bn of government bonds from March in an unprecedented quantitative easing programme. The programme is open-ended, and will run until September 2016 at the earliest.

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Speaking at a press conference following the governing council meeting, ECB president Mario Draghi said that the bond-buying programme would remain in place “until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2%”

Prices across the currency union fell by 0.2 percent in December, the first time the eurozone recorded negative inflation since 2009. Although the fall was largely attributed to falling oil prices, it has heightened concerns about a prolonged period of deflation in the eurozone.

Although the 25-member council did not back the programme unanimously, Draghi said that the ECB’s decision was made with “so large a majority that no vote was necessary”.

The Frankfurt-based bank hopes to boost inflation and drive down the value of the euro against other major currencies in a bid to make the bloc’s exports more attractive.

Quantitative easing (QE) involves central banks buying up government bonds to inject more money into the system - a path trodden in recent years by the US Federal Reserve and the Bank of England in response to the 2008-9 financial crisis.

However, it is regarded as a move of last resort for central banks.

“Today’s QE announcement is historic but it was also the ECB’s last trump,” said ING chief economist Carsten Brzeski.

“The flowery phrase that the ball is now back in the court of Eurozone governments has never been more true than today. Even worse, the ECB will not be able to pick it up again if governments try to play at back,” he said.

Gregory Claeys, a research fellow with the Bruegel think tank in Brussels, described Draghi’s announcement as “a welcome surprise” and “more than the markets were expecting”.

He said that the announcement would likely prompt a swift depreciation in the euro’s value.

Praising the ECB’s boldness, he commented that “there’s no point not using an instrument just so you can say you have another trick up your sleeve”.

Although the programme will not be welcomed warmly by Germany, whose two members of the the ECB’s governing council had indicated their opposition to a QE programme, Draghi offered a major concession to calm fears that German taxpayers would become liable for billions of euros of debt belonging to other eurozone countries.

Only 20 percent of the new bond-purchases will be subject to “risk-sharing”, meaning that national central banks will bear most of the risk of their governments defaulting on their debts.

Meanwhile, the ECB also kept its headline interest rate unchanged at 0.05 percent.

ECB bond-buying will 'not be a cure'

Nobody should mistake an injection of more cash into the eurozone economy for an economic cure, says one of the World Bank authors of a recent bleak report on the eurozone.

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