Each month the ECB will buy in the secondary market securities at € 60 billion, and the purchase will last from March 2015 until the end of September 2016, announced ECB President Mario Draghi at a press conference on Thursday.
The program quantitative easing totaling € 1,1 трлн includes existing repurchase program of selected financial instruments of the private sector – the so-called ABS and covered bonds. As the chief economist at Capital Economics in Europe Jonathan Loyns, buying bonds and ABS coated estimated at about € 10 billion a month, so the actual QE will be around € 50 billion per month. With this money the ECB would buy sovereign bonds investment rating category and debentures “agencies and the European institutions” (which is exactly what is meant by this is not clear).
Deflation closer
According to the press release ECB QE action may be extended after September 2016, if the objectives of the program at that time will not be achieved. The main objective of the ECB – to return the annual rate of inflation in the euro zone to a figure close to 2% (this is the official benchmark ECB).
In December 2014, inflation in the euro area for the first time since 2009, adopted a negative value: consumer prices fell by 0.2% in annual terms. Such price dynamics threatens to go into a deflationary spiral from which it is very difficult to get out. A classic example of that more than once recollected European policymakers, is Japan, where the regular reduction in producer prices in the 1990s led to a further deceleration in consumer demand and in the end – to the “lost decade” for the economy.
The positive response
Financial markets in Europe have reacted positively to classified ECB. The pan-European FTSEurofirst 300 index of shares, according to Reuters at 19:45 MSK, closed in positive territory at 1.6%, and the growth leaders were the shares of banks and automakers: the first interested in reviving lending activity on the background of QE, the second win in the export direction from desheveyuschey euro.
The euro fell against the dollar after the announcement Draghi and selling the Euro strengthened by Thursday evening. At 20:20 MSK euro exchange rate fell by 1.7% on the previous day and was $ 1.141 per euro. So cheap euro is not worth since September 2003.
The long-awaited decision by the ECB welcomed the International Monetary Fund. “The planned expansion of the ECB’s balance sheet will help reduce the cost of borrowing in the euro area, to raise inflation expectations and reduce the risk of a prolonged period of low inflation,” – said the head of the IMF, Christine Lagarde.
«currency war»
The ECB is not engaged in exchange rate policy, which once again confirmed Draghi, but the European QE, obviously, will keep the euro at low levels. Since September 2014, when Draghi revealed plan of buying assets, the euro fell against the dollar by almost 12%. Quantitative easing in Europe, wittingly or unwittingly, could be the next episode of “currency wars” – competitive devaluations to obtain advantages in international trade. This was at the World Economic Forum in Davos, in particular, the president warned Goldman Sachs Gary Cohn. “Currency war” is already underway. The prevailing view is that the easiest way to stimulate economic growth – a cheap currency, “- said Cohn, meeting in Davos, a few hours before the announcement of the ECB.
The shift towards the ECB unorthodox monetary instruments held despite conventional opposition from Germany, and has since completed a program of quantitative easing, the US Federal Reserve. “Divergence cycles of monetary policy, as well as differences in the ways of economic recovery,” among the leading countries – that’s the reason the currency trends of recent years, Draghi said.
The assets of the ECB currently account for about € 2,2 трлн ($ 2.5 trillion). In view of the QE program and the upcoming maturity banks crisis of long-term loans for € 200 billion balance sheet of the ECB in September 2016 could rise to € 3,2 трлн (about $ 3.7 trillion at current exchange rates). For comparison, the Fed’s balance sheet now stands at $ 4.5 trillion.
Now, in addition to the ECB, actively promotes a policy of holding the Bank of Japan, and it is symbolic: leading economists such as Harvard professor Rogoff Kennett, believe that Japan and Europe are faced with similar problems – lack of economic growth and low inflation. In theory, QE should solve these problems.
Former US Treasury Secretary Larry Summers, doubt the effectiveness of QE in the US, said that in Europe, this policy has even less chance of success. “It is a mistake to think that QE – a panacea for Europe and that this policy will lead to sufficient results,” – he warned on Thursday, speaking in Davos.
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