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Fri, 23 Jan, 2015 04:27:48 AM
FTimes-Xinhua Report, Jan 23

 

The European Central Bank decided on Thursday to start a large scale quantitative easing program and pump over one trillion euros into the euro zone economy in a bid to address risks of deflation.

     The decision was welcomed by markets, but criticized by opponents from Germany.

     From March this year, the ECB and national central banks in the euro zone would purchase bonds and securities from euro zone governments, agencies and European institutions in addition to the existing purchasing programs of bonds and securities issued in private sector.

     According to ECB President Mario Draghi, the total purchasing would amount to 60 billion euros (about 69 billion U.S. dollars) per month. It would last at least until the end of September 2016, and could be extended until the ECB saw a sustained adjustment in the path of inflation which is consistent with its medium-term inflation maintenance target of below, but close to, 2 percent.

     Markets highly expected the decision and speculated about a QE program of at least 500 billion euros. Shortly after the decision was announced, the euro slumped against the U.S. dollar to a 11 year low level. Eurozone government bonds yield hit record lows, while stock shares in Europe climbed.

     "Instead of keeping some aces up their sleeves, the ECB showed its entire hand: a fully-fledged program with exact numbers," said Carsten Brzeski, chief economist of ING Bank.

     Draghi said the decision received a "large majority" in ECB's governing council. Previously, opponents, especially Germany, worried that purchasing government bonds would force them to share risks of weak economies in troubled countries in the euro zone.

     In the Thursday decision, however, only 20 percent of the purchasing would be subject to "a regime of risk sharing", the rest 80 percent would be held by national central banks with the risk of losses the responsibility of their own.

     Draghi said the program would be coordinated by the ECB. The purchases of securities issued by euro zone governments and agencies would be based on national central banks' share in the ECB's capital key which was roughly 18 percent for Germany, 14 percent for France, 12 percent for Italy and 9 percent for Spain.

     Later on Thursday, several leaders in German industry criticized the QE program, arguing that the massive monetary expansion would lead to bubbles in property markets and breach ECB's mandate under EU laws. Some doubted its effects on lifting prices and boosting investments.

     "The ECB has no need to play its last card right now," said Martin Wansleben, chief executive of Association of German Chambers of Commerce and Industry (DIHK).

     "The effects of the purchases of government bonds on price development in the euro zone are uncertain," he said. "At the same time, it weakens the pressure of urgently needed reforms on the member states."

     However, few option was left for the ECB to choose in its fighting against risks of deflation. Annual inflation rate in the euro zone dipped to a negative territory in December 2014 and reached minus 0.2 percent despite ECB's previous stimulating efforts of cutting interest rates and buying private sector bonds and asset-backed securities.

     Draghi said inflation dynamics continued to be weaker than expected, the ECB's previous bond and security purchasing program in private sectors was insufficient to adequately address the risk of too prolonged a period of low inflation in the euro zone.

     Economists were warning that the common currency area was in danger of falling into a deflation spiral where consumers would postpone their spending due to expectations of further drop in prices. Economy would thus be hurt.

     Draghi said the downside risks surrounding the euro zone economy should diminish after today's decision, which was expected to ease monetary and financial conditions for firms and households, making their access to finance cheaper, supporting investment and consumption, but reforms were needed from governments in order to restore confidence.

     "What monetary policy can do is 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 reform," he said.

     He also urged governments to adjust their fiscal policies and use their available fiscal scope to support economic recovery.

    "After today the ball is once again with euro zone governments, and it will be very difficult to ever kick it back," ING Bank's Brzeski commented. 

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