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Jan 23, 2015 02:30 PM IST | Source:

Draghi announces 60 bn euro/month QE programme

The European Central Bank announced higher than expected monthly bond buying programme amounting to 60 billion euro till September 2016. It, however, kept benchmark interest rate unchanged.

Jhini Sinha Phira
Moneycontrol Bureau

The European Central Bank (ECB) announced higher-than-expected monthly bond buying programme of 60 billion euros, totalling  1.1 trillion euros, that will go on till September 2016. It, however, kept benchmark interest rate unchanged. Announcing the extent of Quantitative Easing, ECB chief Mario Draghi also said the central bank will work towards the objective of bringing inflation closer to 2 percent.

The ECB kept benchmark rate unchanged at 0.05 percent and left both marginal facility interest rate and deposit facility rate intact at 0.3 percent and -0.2 percent, respectively.

European markets as well as US futures shot up post the QE announcement. At the time of writing the report, CAC was up nearly 1 percent while FTSE and DAX each were trading 0.5 percent higher.

The ECB chief said private and public bond-buying program will last until at least September 2016 and the measures will aid inflation that is seen moving up gradually in 2015. As of December 2014, inflation rate stood at minus 0.2 percent. The asset-purchasing programme will start in March.

According to Draghi's plan, all 19 national central banks that together with the ECB make the Eurosystem, will buy the bonds of its own government and bear any risk of losses on it. Under ordinary circumstances, ECB's monetary policy rule says any risk of losses is  shared between all 19 central banks based on the economic and demographic weight of their countries in eurozone. The ECB calls it capital keys which will still be important but in some ways marks a victory for Germany. Jens Weidmann, head of the German Bundesbank, convinced ECB boss to let the central banks of less creditworthy countries bear the risk of their bonds.

Policymakers attending the World Economic Forum in Davos were certain that ECB would announce a QE —street was pegging it lower at 50 billion euros per month — but remained skeptical of its success. Speaking to CNBC-TV18 in Davos, Jan Lambregts, Director, Head of Research (Asia) at Rabobank said he did not expect the ECB to give a full-fledged plan today.

Federal Reserve's three rounds of QE theoritically suggests the exercise would pump up stocks, commodities and bond yields leading to some real economic growth. If Draghi goes for it, he is expected to roll out more such initiatives instead of stopping at one.

ECB's bond-buying programme is expected to push the dollar to new highs and put downward pressure on commodities including crude.

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