ECB Plans Massive QE programme for eurozone
The European Central Bank (ECB) has announced it will inject billions of euros into the ailing eurozone economy.
The ECB will purchase bonds worth €60bn per month until the end of September 2016 and possibly longer, in what is known as quantitative easing (QE).
The ECB has also said eurozone interest rates are being held at the record low of 0.05%, where they have been since September 2014.
ECB president Mario Draghi said the programme would begin in March.
He told a news conference the ECB would be purchasing euro-denominated investment grade securities in the secondary market.
He said the programme would be conducted “until we see a sustained adjustment in the path of inflation”, which the ECB has pledged to maintain at close to 2%.
Earlier this month, figures showed the eurozone was suffering deflation, creating the danger that growth would stall as businesses and consumers shut their wallets, as they waited for prices to fall.
The eurozone is flagging and the ECB is seeking ways to stimulate spending.
Lowering the cost of borrowing should encourage banks to lend and eurozone businesses and consumers to spend more.
It is a strategy that appears to have worked in the US, which undertook a huge programme of QE between 2008 and 2014.
The UK and Japan have also had sizeable bond-buying programmes.
Mr Draghi said the ECB’s own programme had been taken “to counter two unfavourable developments”.
“Inflation dynamics have continued to be weaker than expected,” he said, with most inflation indicators at or close to historical lows.
“Economic slack in the euro area remains sizeable and money and credit developments continue to be subdued,” he added.
At the same time, it was necessary to “address heightened risks of too prolonged a period of low inflation”.
What is a government bond?
Governments borrow money by selling bonds to investors. A bond is an IOU. In return for the investor’s cash, the government promises to pay a fixed rate of interest over a specific period – say 4% every year for 10 years. At the end of the period, the investor is repaid the cash they originally paid, cancelling that particular bit of government debt.
Government bonds have traditionally been seen as ultra-safe long-term investments and are held by pension funds, insurance companies and banks, as well as private investors. They are a vital way for countries to raise funds.
Up until now, the ECB has resisted QE, although the bank’s president, Mario Draghi, reassured markets in July 2012 by saying he would be prepared to do whatever it took to maintain financial stability in the eurozone, nicknamed his “big bazooka” speech.
Since then, the case for quantitative easing has been growing.
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