In a much anticipated move, president of the European Central Bank (ECB), Mario Draghi, has announced that the bank will commence a programme of asset purchases later this month.
The exact size of the financial support has not been specified, but analysts believe the scale will be much more modest than that of the quantitative easing (QE) measures employed by other major central banks such as the Federal Reserve, Bank of Japan and Bank of England. There is speculation that approximately €200 billion will be pumped into the Eurozone economy over the next twelve months – at the height of its asset purchase scheme, the Fed was investing $85 billion a month.
As with other QE schemes, the purpose of the move is to enhance liquidity in the economy of the Eurozone and boost the availability of funds to banks which in turn can be lent to businesses. Announcing the measures, Mr Draghi said: “The recovery is likely to continue to be dampened by high unemployment, sizeable unutilised capacity and continued negative bank loan growth to the private sector. In particular, the recent weakening in the euro area’s growth momentum, alongside heightened geopolitical risk, could dampen confidence and, in particular, private investment.†He anticipated that the move would “ease the monetary policy stance of the bankâ€
In contrast to other QE schemes, the asset purchase programme will not cover the purchase of sovereign bonds (as this technically would infringe the bank’s operating principles), as at the moment, it can only do so to support the borrowing of nations in receipt of an IMF/EU bailout; a move designed to protect such nations from prohibitively high money market borrowing rates which has worked well as it has never had to be implemented since the sovereign debt crisis raged in Europe. At the moment so-called “covered bonds†will be bought – these are assets backed by public sector loans or mortgages.
