Europe fires up the printing press

The European Central Bank has finally joined the other central banks in launching quantitative easing.

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.

Recommended

Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Just how green is nuclear power?
Energy

Just how green is nuclear power?

Nuclear power is certainly very clean in terms of carbon emissions, but what about the radioactive waste produced as a byproduct? It’s not as much of …
22 Jan 2022
Inflation: now we really have something to worry about
Inflation

Inflation: now we really have something to worry about

We’ve been worrying about a sharp rise in inflation for years, says Merryn Somerset Webb – now, we finally have something to worry about.
21 Jan 2022
Amazon halts plans to ban UK Visa credit card payments
Personal finance

Amazon halts plans to ban UK Visa credit card payments

Amazon has said that it is to shelve its proposed ban on UK customers making payments with Visa credit cards.
17 Jan 2022

Most Popular

Ask for a pay rise – everyone else is
Inflation

Ask for a pay rise – everyone else is

As inflation bites and the labour market remains tight, many of the nation's employees are asking for a pay rise. Merryn Somerset Webb explains why yo…
17 Jan 2022
Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Interest rates might rise faster than expected – what does that mean for your money?
Global Economy

Interest rates might rise faster than expected – what does that mean for your money?

The idea that the US Federal Reserve could raise interest rates much earlier than anticipated has upset the markets. John Stepek explains why, and wha…
6 Jan 2022