Doha: The European Central Bank (ECB) surprised markets on September 4 by announcing its first dose of Quantitative Easing (QE) for the moribund eurozone economy. Policy rates were cut by 10 basis points, taking the deposit rate further into the negative territory (-0.2 percent).
In addition, the ECB has belatedly joined other major central banks in announcing QE in the form of private sector asset purchases. It remains to be seen whether the new set of measures, which have started to become known as Draghinomics (after Mario Draghi, President of the ECB), will be enough to combat the eurozone’s problems of slow growth, high unemployment and near zero inflation, says a report by the QNB Group yesterday.
However, the new policy is already leading to a further depreciation of the euro, which could boost exports and avoid deflation.
The ECB had previously delivered a significant monetary easing package to spur economic activity in its June meeting. The package included the introduction of a negative interest rate on deposits (-0.1 percent) — the first time a major central bank has charged commercial banks for their deposits at the central bank. It also included the Targeted Long-Term Refinancing Operations (TLTROs), which aim to provide cheap funding to banks in order to encourage lending to the real economy.
While it takes time for monetary policy to have an effect on the real economy (in fact, the first TLTRO is planned to take place this September), recent weak macroeconomic data in the eurozone have prompted the ECB to do more last week.
Since the June meeting, economic activity in the eurozone has been sluggish. GDP was flat in Q2 relative to the previous quarter. PMI surveys show modest expansion in the third quarter, with contraction in countries like France and Italy. More dangerously, eurozone inflation has continued to edge down reaching 0.3 percent in August from 0.4 percent in July.
Inflation is expected to remain much lower than the ECB’s stated inflation target of “below, but close to, 2 percent”.
The ECB has, for the first time, announced its plan to start its own version of QE. This comes almost six years after the US Federal Reserve introduced its first round of QE in response to the financial crisis. Starting in October 2014, the ECB will purchase a portfolio of private-sector assets, which include asset-backed securities and covered bonds. These purchases will be financed by an increase in the monetary base. The ECB aims to use QE and TLTROs to significantly expand the size of its balance sheet by about €1 trillion to around €3 trillion, the level it reached in the beginning of 2012.
Such large expansion in the balance sheet could have a significant impact on the euro. Overall, Draghinomics may help the eurozone to recover and avoid deflation. Its new flagship scheme, a private-sector QE programme, may have come later than other major central banks, but better late than never.
The Peninsula
