The European Central Bank (ECB) has today announced a fresh landmark round of quantitative easing (QE) amounting to €60bn a month from March until the end of September 2016.
The programme will comprise €1.1trn in asset purchases over the 18 months after March in order to address the risks of a too prolonged period of low inflation in the eurozone after the region officially entered deflation last month.
Speaking at the World Economic Forum in Davos, ECB president Mario Draghi (pictured) explained the expanded asset purchase programme would combine monthly purchases of public and private sector securities until the eurozone sees a “sustained adjustment in the path of inflation” which is “consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term”.
He said the ECB will buy bonds issued by euro area central governments, agencies and European institutions in the secondary market against central bank money, which the institutions that sold the securities can use to buy other assets and extend credit to the real economy.
In a supporting statement, the ECB said: “Asset purchases provide monetary stimulus to the economy in a context where key ECB interest rates are at their lower bound. They further ease monetary and financial conditions, making access to finance cheaper for firms and households. This tends to support investment and consumption, and ultimately contributes to a return of inflation rates towards 2%.”
The ECB said the programme will encompass the existing asset-backed securities purchase programme (ABSPP) and the covered bond purchase programme (CBPP3), which were both launched late last year.
With regard to the sharing of hypothetical losses, the ECB said purchases of securities of European institutions (which will be 12% of the additional asset purchases by central banks) will be subject to loss sharing. The rest of the central banks’ additional asset purchases will not be subject to loss sharing. The ECB will hold 8% of the additional asset purchases. This implies that 20% of the additional asset purchases will be subject to a regime of risk sharing.
The bank will also keep key ECB interest rates unchanged in line with its forward guidance policy.
Hermes group chief economist Neil Williams said Draghi had taken the “giant leap forward” financial markets were waiting for, but added it will be “no panacea”.
He said: “This and his prior pledge to do ‘whatever it takes’, means Mr Draghi is doing a good job of addressing the symptoms of the crisis – escalating funding costs and, more recently, deflation. Also, his avoidance today of ‘blanket’ risk-sharing and skewing the bond purchases according to members’ capital contributions to the ECB will appeal to those worried that fiscal discipline would be thrown out of the window.
“But anyone expecting the QE bazooka to quickly fix the problem – a monetary union still devoid of sufficient economic union – will be disappointed. Within the eurozone, shifts in euro-members’ competitiveness are still far too disparate for that happen.”
Elsewhere, Axa Investment Managers lead fund manager of the Smart Diversified Growth Fund, Yoram Lustig, said the fund was overweight in equities on the belief that markets should be supported in the medium term by the boost to the global economy due to low oil price, liquidity (QE from Draghi) and the US economy “continuing to roar”.
He added: “In our core, we maintain an overweight position in equities. In the margin, we plan to be more tactical, using futures contracts on equity indices to aim to buy on the lows and sell on the highs. As such, we plan to take profits after Draghi says what everyone expects him to say, as we believe volatility is around the corner and the Eurostoxx Index is overbought.”
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