ECB set for money-printing move

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Published: Thursday 22nd January 2015 by The News Editor

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The European Central Bank is today set to pull the trigger on a major money-printing programme to stimulate the region’s moribund economy.

In a widely-anticipated move ECB president Mario Draghi is expected to signal the start of a one trillion euro (£770 billion) bond purchasing programme along the lines of the quantitative easing (QE) that has already been pursued in the UK and US.

The central bank is under pressure to act as the bloc faces stagnation, with inflation sliding below zero – accelerated by the slide in the oil price and raising the threat of a damaging spiral of falling prices.

Mr Draghi pledged two and a half years ago to do “whatever it takes” to preserve the single currency and markets will be keen to see him set out details of the plan.

Officials in London will also be looking anxiously at the announcement with eurozone weakness seen as a key threat to the UK.

The anticipated impact of QE in driving down the value of the euro has already helped the pound climb – welcome for UK holidaymakers in Spain and France but less so for British businesses exporting to the continent.

Experts suggest the devil will be in the detail – or lack of it – in the ECB move with German reluctance thought likely to threaten the scope and effectiveness of the programme, which would involve buying Government bonds.

It would follow similar stimulus strategies deployed during the recession by the Bank of England and the US Federal Reserve.

Interest rates in the eurozone have already been slashed to 0.05% but signals from policy makers in recent weeks suggest they believe more needs to be done to shake the economy from its torpor.

The prospects for QE being launched by the ECB have been hampered by legal questions and political ramifications for a fiscal area that is constituted by 19 sovereign states.

But a recent European court decision that appears to pave the way for the move, combined with the tumble into negative inflation (of 0.2%) for the first time since the financial crisis on 2009, has boosted its likelihood.

Europe has been buffeted by the uncertainty caused by the Ukraine crisis and more recently by fears that an election in Greece this weekend will see the rise of an anti-austerity party threatening to jeopardise the troubled state’s bail-out plan.

Scotiabank’s Alan Clarke said: “The ECB must announce a QE programme this week, or face the risk of a strong backlash in financial markets (refuelling doubts about the willingness of the ECB to act).

“However, we do not exclude the possibility that, while the principle of QE could be announced, the ECB may choose to delay releasing details or launching the programme until February or March.”

Experts at Societe Generale said: “The devil will once again be in the detail, which will make trading the announcement on January 22 quite tricky.

“The ECB often announces the broad spirit of a new initiative, leaving the details for later, and that is a strategy that it should repeat, at the risk of initially disappointing investors.”

The policy of buying the bonds – parcels of government debt – is designed to have a number of effects though their effectiveness is debated by economists.

One expected outcome is that it pushes down the yields investors can expect to earn from them, so that they are instead pushed into buying riskier assets.

Because government bonds are less attractive, it is hoped that investors will instead want to lend money elsewhere, boosting the availability of credit in the economy.

The poor earnings to be had from euro debt would also be expected to drive investment into foreign currencies, weakening the single currency and improving the prospects for the continent’s exporters.

Published: Thursday 22nd January 2015 by The News Editor

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