The European Central Bank’s (ECB) landmark €1.1 trillion (£800bn) debt-buying programme will kick off on Sunday and boost Eurozone growth throughout 2015 and 2016, a confident Mario Draghi announced yesterday.
ECB president Draghi and the bank’s forecasters are confident the programme – also known as quantitative easing (QE) – will be effective at rescuing the Eurozone from its low-growth, low-inflation quagmire.
Draghi said there had been “some further improvements in economic activity at the beginning of this year. Looking ahead, we expect the economic recovery to broaden and strengthen gradually.” Meanwhile, new ECB forecasts released yesterday – which include the effect of QE – see inflation hitting 1.5 per cent in 2016 and growth totalling 1.9 per cent, both upward revisions on previous predictions.
This year, growth is expected to hit 1.5 per cent – up from the previous forecast of just one per cent.
“The ECB’s macroeconomic assessment sounded as if the central bank is a bit inebriated by its own QE announcement. It was the most positive and optimistic assessment in a long while,” said economist Carsten Brzeski from ING Bank.
The ECB will buy €50bn worth of debt per month until at least September 2016 but said the plan could be extended if inflation had not returned to its target of close to, but below, two per cent. Eurozone inflation is currently minus 0.3 per cent. The government debt purchases will be on top of €10bn of private sector debt that is already in process, taking total monthly purchases to €60bn.
The public sector debt includes all countries in the Eurozone except for Greece and Cyprus, who have failed to meet a number of criteria. Draghi had to defend against accusations the ECB was not helping Greece, arguing that the ECB had loaned an amount to Greece equivalent to 68 per cent of the country’s GDP.
Also included in the €60bn of purchases is the debt of public sector organisations such as the European Atomic Energy Community, the European Investment Bank and Nordic Investment Bank.
Much of Europe’s debt is held outside the Eurozone, which means it could have a larger impact on the exchange rate than other QE programmes. The euro hit an 11-year low against the dollar earlier this week.
“If the overseas investors do indeed become the main sellers to the ECB... the euro simply carries on weakening and overshoots to well below parity against the US dollar,” said economist David Owen from investment bank Jefferies.