The European Central Bank’s vote to introduce a quantitative easing programme was widely expected, however concerns have been raised as to whether meaningful results will be achieved through the mechanism.
Yesterday, ECB president Mario Draghi announced that it would start monthly sovereign-bond purchases of €60bn (£45bn) from March 2015 until towards the end of 2016, by which point its balance sheet will stand somewhere above €1,000bn (£755bn).
The ECB will guarantee 20 per cent of the additional debt, with member-state central banks sharing the remaining 80 per cent between them, approximately in line with economic output.
Alasdair Cavalla, economist for the Centre for Economics and Business Research, said the ECB has been “forced to act”, noting that the eurozone is struggling to meet its inflation target, while growth remains sluggish.
“Subdued demand makes businesses reluctant to invest and consumers hesitant to spend in a climate of elevated and persistent uncertainty.
“Continued reductions in costs of oil and food have pushed the overall consumer price index into deflation, while even the core inflation rate that excludes these more volatile items stood at just 0.7 per cent year-on-year for December. The ECB has therefore been forced to act despite strong opposition from Germany and other northern European member states.”
He added that QE has long been seen as “inevitable”, as it was the one policy that had been used in the US and the UK economies, now in apparent recovery, which had not yet been used in the eurozone.
However, Mr Cavalla warned the eurozone context is “very different” and this would suggest a “smaller chance of success”.
Finance markets are much less important for European firms than elsewhere and the property market contributes less as fewer people own property, he added.
Jonathan Loynes, chief european economist at Capital Economics, commented that “whether or not Mr Draghi signals that the programme may be extended in the future, and what objectives the ECB has for QE, might also be important influences on how it is initially received”.
He pointed out that: “Regardless of the precise details, it is worth remembering that the international experience of QE has been mixed at best and that there are reasons – not least the weakness of the banking system and already low levels of bond yields – to think that it might be less effective in the eurozone than elsewhere.
“In short, QE is coming but don’t expect it to cure all of the currency union’s troubles.”
Ben Brettell, senior economist at Hargreaves Lansdown, agreed that the “sixty-four thousand euro question” is whether QE will work “but the answer is uncertain”.
He explained that a recent Bank of England study suggests QE in the UK did little to increase bank lending. “However, the size of the ECB’s programme, combined with its potentially open-ended nature, should convince markets that Mario Draghi is committed to fighting deflation.
“Overall I believe the risks of not acting are greater than the risk of the measures announced today. In many ways the fact that Draghi has finally been forced to use his silver bullet is a measure of how bad the economic situation in Europe has become.
Mr Brettell added: “Bundesbank officials have made it clear they don’t think economic conditions warrant QE, but few outside Germany would agree that today’s measures are anything less than necessary.”
donia.o’loughlin@ft.com
