The European Central Bank “has crossed the Rubicon”, says The Economist’s Free Exchange blog. Last Monday it finally joined other major central banks and launched quantitative easing (QE), intended to ward off deflation and bolster growth.
It will inject €60bn a month into the economy by buying bonds with freshly created money. It plans to do this until September 2016, but will keep going if inflation shows no sign of heading back towards its target of 2%. Prices are now falling at an annual rate of 0.3%.
Previous rounds of QE by the Bank of England and the US Federal Reserve did little more than steady the economy. And it looks as though the ECB may struggle even to match those efforts.
For one thing, as Capital Economics points out, this QE programme is half the size of the UK and US ones relative to GDP, while it is being launched long after the crisis broke. So the boost to overall confidence and inflation expectations is likely to be smaller.
In particular, there is little scope for boosting lending by lowering yields. Eurozone banks are in worse shape than in the Anglo-Saxon countries, so they will be reluctant to lend – even if businesses and consumers are inclined to borrow. Spain’s five-year government bond yield is just 0.6% but the rate on one- to five-year bank loans for new firms is 4%.
And while QE will weaken the currency, the weak global recovery will keep a lid on export growth. Still, we know that printed cash always finds its way into asset markets. So the ECB’s plans are likely to be good for European equities at least.