ECB
president Mario Draghi pledges €60bn monthly top-up until September in
quantitative easing move to save currency bloc
In the
teeth of fierce political resistance from Germany, ECB president Mario Draghi
said he would inject €60bn of new money into financial markets every month
until at least September 2016.
The
Frankfurt-based bank will use electronically created money to buy the bonds of
eurozone governments – quantitative easing – to try to boost confidence, push
up inflation and drive down the value of the single currency, helping to
increase exports and kickstart growth.
Nancy
Curtin, chief investment officer of the City firm Close Brothers, said: “The
eurozone was in need of shock and awe tactics from the ECB to combat the prospect
of a prolonged period of deflation, and Draghi has finally delivered on his
promise to do whatever it takes.”
The euro
fell to $1.14 against the dollar after the announcement – its lowest level for
11 years, and well below the $1.17 exchange rate at which the single currency
was launched. British holidaymakers planning a spring break on the continent
also received a fillip, as the euro lost more than 1% of its value against the
pound, with a euro now worth just 75p.
The
€60bn-a-month price tag for the QE programme, which will start in March, was
larger than many in financial markets had expected, and underlined Draghi’s
determination to hold the 19-member currency zone together. The banker,
nicknamed “Super Mario” by traders, promised QE would continue “until we see a
sustained adjustment in the path of inflation”.
The ECB is
meant to keep inflation below, but close to, its target level of 2% – but
prices have been rising at less than half that pace for the past year, against
a background of plunging oil prices and anaemic growth. With average prices in
the shops already falling across the single currency area, the ECB hopes to
avoid the threat of a deflationary spiral, in which consumers and businesses
slash spending while they wait for prices to fall further, dragging the economy
into a recession.
Speaking in
Frankfurt Draghi said: “The risks surrounding the economic outlook for the euro
area remain on the downside, but should have diminished after today’s monetary
policy decisions and the continued fall in oil prices over recent weeks.”
The
long-awaited launch of QE will infuriate Berlin, which views the policy as akin
to a bailout for free-spending governments such as Greece, and fears that it
could allow inflation to get out of control. A headline on the website of the
newspaper Bild after the announcement read: “ECB takes billions of debt off
ailing euro states: What happens to my money now?”
Draghi said
the decision of the ECB’s governing council was made with “so large a majority
that no vote was necessary”, but that suggested that the Bundesbank president,
Jens Weidmann, had stuck by his longstanding opposition to QE.
Angela
Merkel, the German chancellor, speaking at the World Economic Forum in Davos,
said: “It does not surprise me that there is a contentious debate within the
ECB. The world is already well supplied with liquidity. Regardless of what the
ECB does, it should not obscure the fact that the real growth impulses must
come from conditions set by the politicians.”
Policymakers
in the US and the UK have used QE to restore confidence and unblock financial
markets since the depths of the credit crisis in 2009, but the ECB had been
reluctant to follow suit in the face of German opposition and fears that it
could unleash inflation.
A slowdown
in the eurozone, Britain’s major export market, is one of the key risks to UK
economic recovery.
George
Osborne said: “The fact that the ECB had to take this drastic action shows the
European economy is much weaker than the UK economy and it’s also a warning to
Britain of the risks that lie ahead if we were to abandon our long term
economic plan.”
John
Cridland, director general of the CBI, welcomed Draghi’s move: “At the moment,
flagging eurozone economies are dragging on UK and world growth. Quantitative
easing will give the Eurozone recovery a much-needed boost, which should also
have a positive economic effect in the UK.”
Christine
Lagarde, managing director of the IMF, which cut its growth forecasts for
Germany, France and Italy last week, said QE should “help lower borrowing costs
across the euro area, raise inflation expectations and reduce the risk of a
protracted period of low inflation”.
The
€60bn-a-month total for the QE programme includes the purchase of private
sector assets that the ECB had already begun, to try to unlock credit markets.
Draghi
echoed Merkel’s call for national governments to take their own steps to
kickstart growth, stressing that QE alone would not repair the eurozone
economy. “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.”
“Today the
ECB has finally arrived as a truly ‘European’ Central Bank. It has acted
against political opposition to deliver what is by most measures an ambitious
programme of quantitative easing,” he said. “The ECB has finally, if belatedly,
done its part. Now it’s time for the eurozone to relax the fiscal constraint.
Draghi
ridiculed the doomsayers predicting that hyperinflation would eventually result
from QE, saying that hawks had repeatedly warned about inflation taking off
each time the ECB had cut interest rates – yet inflation remained very low. He
said there should be a “statute of limitations” on such warnings.
The ECB had
already announced, in a statement earlier on Thursday, that it would leave its
main interest rate unchanged at 0.05%.
In a
concession to German reservations, Draghi promised that national central banks
would bear much of the risk of their governments defaulting, with just 20% of
the new bond-purchases subject to “risk-sharing” between member countries. Some
analysts fear that could dent the effectiveness of the policy.
In an aside
that will be heard loud and clear in Athens, Draghi also warned: “Some
additional eligibility criteria will be applied in the case of countries under
an EU/IMF adjustment programme.”
That could
allow the ECB to exclude Greek bonds from QE if, for example, the populist
Syriza party wins Sunday’s general election and ditches the austerity programme
imposed by its creditors.
