ECB, euro central banks, begin QE stimulus programme

Mario Draghi at the ECB Press Conference in Frankfurt am Main, on 4 Sept. 2014 [ECB/Flickr]

Mario Draghi at the ECB Press Conference in Frankfurt am Main. 4 Sept. 2014 [ECB/Flickr]

The European Central Bank announced Monday (9 March) that it and the national central banks of the euro area have started buying bonds as part of the long-awaited 1.1 trillion euro quantitative easing programme to stimulate growth and ward off deflation across the single currency area.

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

“The ECB and Eurosystem national central banks have, as previously announced, started purchases under the Public Sector Purchase Programme,” the ECB announced via the micro-blogging site Twitter.

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 programme 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 labour 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% this year, 1.9% in 2016 and 2.1% 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.

The European Central Bank agreed on 6 September 2012 to launch a potentially unlimited bond-buying programme to lower struggling eurozone countries' borrowing costs and draw a line under the debt crisis.

>> Read: Draghi gets ECB backing for unlimited bond-buying

The ECB said it would buy government bonds from this March until the end of September 2016 despite opposition from Germany's Bundesbank and concerns in Berlin that it could allow spendthrift countries to slacken economic reforms.

Together with existing schemes to buy private debt and funnel hundreds of billions of euros in cheap loans to banks, the new quantitative easing programme will pump €60 billion a month into the economy, ECB President Mario Draghi said.

By September next year, more than €1 trillion will have been created.

As the biggest contributor to ECB funding, Germany argued it would bear the greatest burden of QE policies – which effectively mean printing more money – and questioned the legality of any such move.

>> Read: Germany’s Bundesbank opens up to Quantitative Easing

Subscribe to our newsletters