Brussels, 22/01/2015 (Agence Europe) - With its decision, on Thursday 22 January, to launch its own quantitative easing (QE) programme for the eurozone, the European Central Bank (ECB) is getting out the big guns to tackle the risks of an extended period of low inflation and to boost growth.
The ECB has decided to launch an “expanded asset purchase programme encompassing the existing purchase programme for asset-backed securities and covered bonds”, in which “combined monthly purchases of public and private-sector securities will amount to €60 billion ”, said the president of the ECB, Mario Draghi, after the meeting of the ECB Governing Council. These purchases will be carried out “until the end of September 2016” and at least until we see a sustained change to the inflation trajectory, in line with the ECB's mission of keeping the annual increase in prices at a level close to but below 2%.
The ECB's announcement, which was expected, was welcomed by the financial markets. “It is more than the markets expected”, said Pat McArdle, the chair of the group of chief economists within the European Banking Federation (EBF). On Thursday afternoon, the euro was up strongly against the dollar.
The purchases of debts of countries in the eurozone and of European institutions on the secondary market will start in March 2015. The volumes of these will depend on the share of the national central banks in the capital of the ECB. The ECB and the national central banks will be able to buy up to 25% of the amount of each obligatory issuance of the various states, and no more than 33% of the debt of any given issuer.
The purchase of Greek and Cypriot government debt will be possible, but subjected to specific conditions. “There is no special rule for Greece. The rules will apply to everybody”, said Draghi, who added that in order to benefit from this QE, the countries whose securities have a downgraded rating will have to be under a bailout plan. The purchase of Greek debt in the framework of the QE will not be able to start “before July”, as the ECB has to wait for the Greek debt already acquired in the framework of the SME programme for the buy-back of sovereign shares launched in May 2010 to expire.
By choosing quantitative easing as its weapon, as the American, Japanese and British central banks have already done, the ECB takes a view that this new massive injection of cash will help to get inflation moving again. It hopes that the financial players will switch to other, riskier assets and that the banks will be motivated to lend more to the economy. QE will also have the effect of keeping the rate of the euro low, thereby supporting European exports.
Nonetheless, the former Governor of the Banca d'Italia has reiterated the importance, for the countries of the eurozone, of continuing with their reforms, in full respect of the Stability and Growth Pact, which he described as an “anchor of stability”. “It is now up to the national governments to implement the reforms. The more they do so, the more effective monetary policy will be”, he stressed.
German misgivings. The ECB had to counter the misgivings, or even outright opposition, of Germany, which is traditionally committed to a strong monetary policy and keeping up the pressure on the other eurozone countries to reform their economies. One might be forgiven for suspecting that procedures might be brought before the German Constitutional Court in Karlsruhe to try to put a stop to this QE, as was the case with the ECB's OMT programme for the buy-back of government debt (see EUROPE 11230).
It is worth noting that although it was taken in line with the new rules stemming from Lithuania's accession to the eurozone (see EUROPE 11158), the ECB's decision was not unanimous. The Governing Council is “unanimous” in its view that the QE is a monetary policy instrument, a “large majority” of its members want to act now and, thirdly, there is a “consensus” on the issue of risk-sharing in the event of any losses on the instruments purchased, Draghi indicated.
The central banker, who is surprised that the question of risk-sharing has attracted so much media attention, stressed that the ECB had no intention of calling into question this principle, the application of which by the Frankfurt-based institute has developed on the basis of the monetary policy instruments implemented. “The question of possible monetary financing exists. But even so, do we want to abandon the principle of a full sharing of the risks? Absolutely not”, Draghi stressed. Amongst other things, he stated that the ECB would put together the details of the QE and coordinate the purchases.
However, the provisions on risk-sharing which will apply to this QE come across like a concession to the members of the ECB Governing Council who are sceptical about whether monetary policy in the eurozone should be relaxed further, and to such an extent. Just 20% of the following purchases made in the framework of the QE will be subject to a risk-sharing regime: 8% of securities purchased by the ECB and 12% of securities of European instruments acquired by the national central banks.
On Thursday, the ECB decided to make changes to the interest rates applicable for the next six TLTRO operations for the mass targeted injection of cash (see EUROPE 11095). Additionally, it has kept the interest rates for the principal refinancing operations (0.05%), the marginal loan facility (0.3%) and the deposit facility (-0.20%) unchanged. (MB)