EuroZone QE (22nd January 2015)

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Jan 222015
 

EuroZone – Late to the QE Party?

Some 6 years after the UK & USA started their programme of Quantitative Easing (QE), the EuroZone have finally got their act together, as reported by the BBC, as follows:

 Summary

(full BBC report HERE).

The European Central Bank (ECB) has announced it will inject billions of euros into the ailing eurozone economy by purchasing bonds worth €60bn per month until the end of September 2016 – far more than previously expected. The ECB has also said eurozone interest rates are being held at the record low of 0.05%, where they have been since September 2014. ECB president Mario Draghi said the programme would begin in March.

He told a news conference the ECB would be purchasing euro-denominated investment grade securities in the secondary market. He said the aim was to achieve a “sustained adjustment in the path of inflation”, which the ECB has pledged to maintain at close to 2%.

The eurozone is flagging and the ECB is seeking ways to stimulate spending. Lowering the cost of borrowing should encourage banks to lend and eurozone businesses and consumers to spend more. It is a strategy that appears to have worked in the US, which undertook a huge programme of QE between 2008 and 2014. The UK and Japan have also had sizeable bond-buying programmes.

What is a government bond?

Governments borrow money by selling bonds to investors. A bond is an IOU. In return for the investor’s cash, the government promises to pay a fixed rate of interest over a specific period – say 4% every year for 10 years. At the end of the period, the investor is repaid the cash they originally paid, cancelling that particular bit of government debt.

Government bonds have traditionally been seen as ultra-safe long-term investments and are held by pension funds, insurance companies and banks, as well as private investors. They are a vital way for countries to raise funds.

Up until now, the ECB has resisted, although the bank’s president, Mario Draghi, reassured markets in July 2012 by saying he would be prepared to do whatever it took to maintain financial stability in the eurozone, nicknamed his “big bazooka” speech.

Since then, the case for quantitative easing has been growing. Earlier this month, figures showed the eurozone was suffering deflation, creating the danger that growth would stall as businesses and consumers shut their wallets, as they waited for prices to fall.

DIY-Investors and QE?

If you think that QE has been positive in the past for the UK & USA stock markets, do you think that there will be any positive spin off for DIY-Investors as a result of this Eurozone QE policy?

Let us know what you think, using the Contact Form.

Mick (22nd January 2015)