Some ECB Members getting QE Cold Feet

For the first time in years, the European Central Bank is embarking on a policy course with a following wind. But already some officials are fretting that the gale they are unleashing may turn into a hurricane.

The concern is that the bond-buying plan launched on Monday to pump more than a trillion euros into the 19-country economy will send stronger members such as Germany that could arguably do without the support into overdrive, while fostering complacency among laggards.

The plan is aimed at lifting euro zone inflation from below zero back up toward the ECB’s target of just under 2 percent. But the risk is that it inflates real estate and share price bubbles and might cause Europe’s biggest economy, which already has record low unemployment of 6.5 percent, to overheat.

Such a scenario could widen the gap between rich and poor member states, further stretching the already strained fabric of European integration, tested again this week when Greece’s finance minister accused the ECB of “asphyxiating” Athens.

On the face of it, the ECB is upbeat.

The central bank projects its plan to print money to buy sovereign bonds – so-called quantitative easing (QE) – will turbo-charge a frail euro zone recovery that is already being helped by lower oil prices and a revival in bank lending.

This is crucial. Had the ECB launched the plan last year when growth was stagnant and banks were reining in credit, the new money would have had a harder time finding its way into the economy – and the stimulus might have fallen flat.

“We did it just at the turning point,” one senior euro zone central banker said of the QE launch, confident the plan can help buoy the economy and lift inflation.

The ECB and its constituent national central banks plan to spend 60 billion euros ($63.66 billion) a month, mainly on sovereign bonds, until at least September 2016.

Buying sovereign bonds will hold down governments’ borrowing costs and keep market interest rates low, encouraging investors to move into riskier assets that will spur growth, while also pushing down the euro currency.

However, the speed and the extent of the euro’s EUR= fall — it has tumbled 12.5 percent against the dollar so far this year, well on track for the biggest quarterly loss since its launch in 1999 — has taken many at the ECB by surprise.

Reuters

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell