ECB confirms bond-buying plan
At Thursday’s conference, the European Central Bank (ECB) finally brought an end to the looming question about quantitative easing. The bank’s president, Mario Draghi, revealed that the ECB had decided to take the plunge and embark upon a bond-buying scheme that will see the bank print fresh money and pump billions of euros into the ailing economy.
It’s an unprecedented move for Europe and one that investors had been expecting for some time. However, they were caught unawares by the size of plan, which will amount to more than one trillion euros by the time the scheme is completed.
Starting in March, the ECB will buy 60 billion euros worth of debt per month until September 2016. Bonds will be bought on the secondary market and in-line with the ECB’s capital key, meaning the larger economies will have more of their bonds purchased compared with the smaller economies.
"The combined monthly purchases of public and private sector securities will amount to 60 billion euros," said Draghi.
"They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim [of rates close to but below two per cent]," he explained.
However, some believe that the ECB’s move comes too late to have enough impact and the massive decline in oil prices will drive inflation lower in coming months. Former ECB policymaker, Athanasios Orphanides, said that “the ECB should have already embarked on QE" and now that “the situation has deteriorated, the ECB will have to do much more".
Stocks rose in Europe and the euro plummeted to 11-year lows in reaction to the news, as traders adjusted to the larger than expected plan. However, Mario Draghi warned that QE alone cannot turn the economy around, further reforms from member-country governments will be necessary also.
“What monetary policy can do is to create the basis for growth, but for growth to pick up you need investment, for investment you need confidence, and for confidence you need structural reforms,” Draghi explained.
“The more [governments] do, the more effective our monetary policy will be,” he added.