As widely expected, the European Central Bank announced that it will start a Quantitative Easing (QE) programme to purchase bonds that will run until September 2016, at the earliest, and start this March. The project will ultimately involve the purchase of more than €1.1 trillion through the electronic creation of money.
QE will inject money into the Eurozone financial system largely through the fees charged by financial organisations to procure the assets. It should force down the yield on bonds by creating a strong market for such assets whilst pushing up their prices. In this way, QE ought to make borrowing (by the bond issuers) cheaper and so stimulate the economy by the provision of “cheap†cash. With central bank interest rates at historic low levels in many developed economies, QE is regarded as an alternative way of increasing liquidity in markets (but it remains highly controversial with some fearing it could ultimately fuel hyper-inflation) which traditionally would be achieved by reducing interest rates. Another criticism of QE is that it makes the rich richer and does little or nothing for the poorer members of society because those holding bonds or stocks are likely to see the value of their assets appreciate.
How did this affect the Euro?
As anticipated, the news has sent the Euro to fresh lows against the Euro, dipping to an 11 year low. Currently, a Euro will buy $1.1346 – at the start of the year it bought $1.2043. A falling Euro will make Eurozone exports more affordable in importing markets. It stands at 0.9887 CHF, having started the year 1.2022 which will encourage many Swiss citizens to pop over the border into the EU to do their shopping, one imagines.
Global stock markets reacted well to the ECB decision: the FTSE was up by 1% whereas the Nasdaq put on a further 1.8%.
