The European Central Bank President Mario Draghi has decided to flood the Eurozone with Federal Reserve type quantitative easing in the staggering amount of €1.1 Trillion!
As expected the Euro fell, and the Swiss National Bank was right when it decided to decouple the Francs away from the Euro.
ECB announces milestone €1.14trn ‘easy money’ program
Edited time: January 22, 2015 14:58
The European Central Bank announced it will embark on a fully-fledged quantitative easing program from March, which will break down to €60 billion per month. The move is made to counter a triple-dip recession in the eurozone.
“Under this expanded program, the combined monthly purchases of public and private securities will amount to €60 billion, intended to be carried out to 2016,” Draghi said Thursday. The bank will buy €1.14tn ($1.3 trillion) in government debt, a decision that will inject extra money into supply, spurring a devaluation in the currency.
His full statement is available on the ECB wesbite.
After the announcement, the euro fell 1.2 percent against the dollar to $1.14, an 11-year low for the currency shared by the 19 nations of the eurozone.
“All monetary measures should provide support to the euro area recovery,” Draghi said, stressing that the package will help investments and boost economic activity.
The bank is far below its target inflation rate of 2 percent, and fell into negative territory in December at -0.2 percent. Draghi said that the actions will be conducted until the bank sees a sustained adjustment in inflation.
The value of the euro has been slipping against the dollar hit an 11-year low against the greenback. At the time of the decision, the euro was trading at $1.16, not far from $1.17 it made at its debut in 1999, the year the currency union was formed.
QE alone can’t revive the battered EU economy, and it will be “up to governments to enact these monetary reforms,” the ECB chief said, adding that the decision taken unanimously by the Governing Council, in a nod to Germany, which publicly rejected the policy.
Germany, the blocs largest economy, has voiced staunch opposition to the plan, and has challenged the legality of the program.
As a sort of concession to Germany, which didn’t support QE, 20 percent of the bank’s bond purchases will be undertaken by national central banks.
Confidence in the south of the EU was shattered, as bond yields in countries like Italy and Spain fell to record lows. The president said that the bank may purchase bonds in Greece after July.
The 19-nation eurozone would be following in the steps of the US, UK, and Japan, which all have created new money to keep their economy afloat during the crisis. The US program created $4.5 trillion in government bonds in total.
Leading up to the announcement, the Swiss National Bank ditched its euro peg, as a QE program would further devalue the euro, and the Swiss franc along with it.
QEs have been largely criticized for not delivering real effect to ordinary people, since the money flows into the bond market and not into people’s direct spending power.
READ MORE: EU better off with ‘helicopter checks’ not QE
The next obstacle for the eurozone is Greece which holds a general election on January 25, where left-wing SYRIZA is poised to take control of the fragile economy that hasn’t seem a significant improvement under its EU bailout plan. In campaign speeches, SYRIZA leaders have promised to re-negotiate the austerity terms the country was forced into. Analysts worry about the political and economic effect on the continent should there be a ‘Grexit’ from the euro.
Massive stimulus plan for eurozone
The European Central Bank (ECB) says it will inject at least €1.1 trillion into the ailing eurozone economy.
The ECB will purchase bonds worth €60bn per month until the end of September 2016 and possibly longer, in what is known as quantitative easing (QE).
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 said the programme would be conducted “until we see a sustained adjustment in the path of inflation”, which the ECB has pledged to maintain at close to 2%.
He told a news conference the ECB would be purchasing euro-denominated investment grade securities issued by euro-area governments and agencies and European institutions.
However, “some additional eligibility criteria” would be applied in the case of countries under an EU and International Monetary Fund adjustment programme.
The value of the euro fell following Mr Draghi’s announcement, falling by more than a cent against the US dollar to $1.1472.
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.
Continue reading the main story
Last Updated at 22 Jan 2015, 14:40 *Chart shows local time
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.
Mr Draghi said the ECB’s own programme had been taken “to counter two unfavourable developments”.
“Inflation dynamics have continued to be weaker than expected,” he said, with most inflation indicators at or close to historical lows.
“Economic slack in the euro area remains sizeable and money and credit developments continue to be subdued,” he added.
At the same time, it was necessary to “address heightened risks of too prolonged a period of low inflation”.
Mr Draghi said there had been a “large majority” on the ECB’s governing council in favour of triggering the bond-buying programme now – “so large that we did not need to take a vote”.
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 QE, although Mr 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.
In advance of the ECB’s announcement, there had been speculation that the central bank would not actually buy any bonds itself, but would invite the central banks of eurozone member governments to do so.
In the event, Mr Draghi said only 20% of the new asset purchases would require national central banks to shoulder risks outside their own borders.
But he added: “The modalities, the amounts, the rules, the limits that you just asked me about have been decided here in Frankfurt. So the governing council is the sole decision-maker and the decisions are meant to affect monetary and financial conditions across the whole euro area.”
Mario Draghi Unveils €60 Billion Per Month QE Through September 2016 With Partial Risk-Sharing: Live Conference Webcast
Submitted by Tyler Durden on 01/22/2015 08:30 -0500
From “whatever it takes” to OMT to “discussing” bond purchases, with European interest rates at record (incomprehensible) lows (apart from Greece) and EURUSD at 11-year lows (down 25 handles in the last 8 months), Mario Draghi looks set to unleash interventionist ‘hell’ on the investing public in Europe with EUR50 billion (plus plus) of ECB QE per month for as long as it takes.
And then there’s this:
- *MERKEL SAYS DEBT CRISIS ‘MORE OR LESS UNDER CONTROL,’ NOT OVER
- *MERKEL SAYS ECB IS MAKING AN INDEPENDENT DECISION TODAY
Live Feed below (in case of error, here is a link to the source webcast):
Here are the highlights, which confirm that yesterday’s widespread rumor was a market-testing trial balloon:
- DRAGHI ANNOUNCES EXPANDED ASSET PURCHASES
- DRAGHI SAYS ECB WILL BUY EU60BLN/MONTH, not the €50BN “leaked” yesterday
- DRAGHI SAYS ECB WILL START AGENCY DEBT PURCHASES IN MARCH
- DRAGHI SAYS ECB ASSET BUYING TO CONTINUE UNTIL SEPT. 2016: so 19 months at €60 billion = €1.1 trillion
- DRAGHI SAYS PURCHASES WILL BE CONDUCTED BASED ON CAPITAL KEY
- DRAGHI SAYS AGENCY DEBT WILL BE SUBJECT TO LOSS SHARING
- DRAGHI SAYS ECB WILL HOLD 8% OF ADDITIONAL ASSET PURCHASES
- DRAGHI SAYS AGENCY DEBT WILL BE 12% OF ADDITIONAL PURCHASES
- DRAGHI SAYS 20% OF PURCHASES TO BE SUBJECT TO RISK SHARING
- DRAGHI SAYS ECB REMOVES 10BP SPREAD ON TLTRO FOR FUTURE
Quick take: slightly more than expected per month, with a slightly shorter duration than expected, amounting to just about €1.1 trillion over 16 months, which is a tad on the low side to the super-aggressive expectations of €1 trillion per year. Furthermore, as expected there will be partial risk-sharing. It is still unclear what are the embedded conditions regarding purchasing Greek or other “junky” bonds.
But the biggest error, and what assures that the ECB’s QE will fail (not that anyone expected it would work of course, and certainly not 99% of the European population), is that unlike the Fed’s and BOJ’s QEs, it is not “open-ended.” The market will not be happy.
* * *
Draghi’s complete prepared remarks:
Mario Draghi, President of the ECB,
Frankfurt am Main, 22 January 2015
Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. Let me wish you all a Happy New Year. I would also like to take this opportunity to welcome Lithuania as the nineteenth country to adopt the euro as its currency. Accordingly, Mr Vasiliauskas, the Chairman of the Board of Lietuvos bankas, became a member of the Governing Council on 1 January 2015. The accession of Lithuania to the euro area on 1 January 2015 triggered a system under which NCB governors take turns holding voting rights on the Governing Council. The details on this rotation system are available on the ECB’s website. We will now report on the outcome of today’s meeting of the Governing Council, which was also attended by the Commission Vice-President, Mr Dombrovskis.
Based on our regular economic and monetary analyses, we conducted a thorough reassessment of the outlook for price developments and of the monetary stimulus achieved. As a result, the Governing Council took the following decisions:
First, it decided to launch an expanded asset purchase programme, encompassing the existing purchase programmes for asset-backed securities and covered bonds. Under this expanded programme, the combined monthly purchases of public and private sector securities will amount to €60 billion. They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term. In March 2015 the Eurosystem will start to purchase euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions in the secondary market. The purchases of securities issued by euro area governments and agencies will be based on the Eurosystem NCBs’ shares in the ECB’s capital key. Some additional eligibility criteria will be applied in the case of countries under an EU/IMF adjustment programme.
Second, the Governing Council decided to change the pricing of the six remaining targeted longer-term refinancing operations (TLTROs). Accordingly , the interest rate applicable to future TLTRO operations will be equal to the rate on the Eurosystem’s main refinancing operations prevailing at the time when each TLTRO is conducted, thereby removing the 10 basis point spread over the MRO rate that applied to the first two TLTROs.
Third, in line with our forward guidance, we decided to keep the key ECB interest rates unchanged.
As regards the additional asset purchases, the Governing Council retains control over all the design features of the programme and the ECB will coordinate the purchases, thereby safeguarding the singleness of the Eurosystem’s monetary policy. The Eurosystem will make use of decentralised implementation to mobilise its resources. With regard to the sharing of hypothetical losses, the Governing Council decided that purchases of securities of European institutions (which will be 12% of the additional asset purchases, and which will be purchased by NCBs) will be subject to loss sharing. The rest of the NCBs’ additional asset purchases will not be subject to loss sharing. The ECB will hold 8% of the additional asset purchases. This implies that 20% of the additional asset purchases will be subject to a regime of risk sharing.
Separate press releases with more detailed information on the expanded asset purchase programme and the pricing of the TLTROs will be published this afternoon at 3.30 p.m.
Today’s monetary policy decision on additional asset purchases was taken to counter two unfavourable developments. First, inflation dynamics have continued to be weaker than expected. While the sharp fall in oil prices over recent months remains the dominant factor driving current headline inflation, the potential for second-round effects on wage and price-setting has increased and could adversely affect medium-term price developments. This assessment is underpinned by a further fall in market-based measures of inflation expectations over all horizons and the fact that most indicators of actual or expected inflation stand at, or close to, their historical lows. At the same time, economic slack in the euro area remains sizeable and money and credit developments continue to be subdued. Second, while the monetary policy measures adopted between June and September last year resulted in a material improvement in terms of financial market prices, this was not the case for the quantitative results. As a consequence, the prevailing degree of monetary accommodation was insufficient to adequately address heightened risks of too prolonged a period of low inflation. Thus, today the adoption of further balance sheet measures has become warranted to achieve our price stability objective, given that the key ECB interest rates have reached their lower bound.
Looking ahead, today’s measures will decisively underpin the firm anchoring of medium to long-term inflation expectations. The sizeable increase in our balance sheet will further ease the monetary policy stance. In particular, financing conditions for firms and households in the euro area will continue to improve. Moreover, today’s decisions will support our forward guidance on the key ECB interest rates and reinforce the fact that there are significant and increasing differences in the monetary policy cycle between major advanced economies. Taken together, these factors should strengthen demand, increase capacity utilisation and support money and credit growth, and thereby contribute to a return of inflation rates towards 2%.
Let me now explain our assessment in greater detail, starting with the economic analysis. Real GDP in the euro area rose by 0.2%, quarter on quarter, in the third quarter of 2014. The latest data and survey evidence point to continued moderate growth at the turn of the year. Looking ahead, recent declines in oil prices have strengthened the basis for the economic recovery to gain momentum. Lower oil prices should support households’ real disposable income and corporate profitability. Domestic demand should also be further supported by our monetary policy measures, the ongoing improvements in financial conditions and the progress made in fiscal consolidation and structural reforms. Furthermore, demand for exports should benefit from the global recovery. However, the euro area recovery is likely to continue to be dampened by high unemployment, sizeable unutilised capacity, and the necessary balance sheet adjustments in the public and private sectors.
The risks surrounding the economic outlook for the euro area remain on the downside, but should have diminished after today’s monetary policy decisions and the continued fall in oil prices over recent weeks.
According to Eurostat, euro area annual HICP inflation was -0.2% in December 2014, after 0.3% in November. This decline mainly reflects a sharp fall in energy price inflation and, to a lesser extent, a decline in the annual rate of change in food prices. On the basis of current information and prevailing futures prices for oil, annual HICP inflation is expected to remain very low or negative in the months ahead. Such low inflation rates are unavoidable in the short term, given the recent very sharp fall in oil prices and assuming that no significant correction will take place in the next few months. Supported by our monetary policy measures, the expected recovery in demand and the assumption of a gradual increase in oil prices in the period ahead, inflation rates are expected to increase gradually later in 2015 and in 2016.
The Governing Council will continue to closely monitor the risks to the outlook for price developments over the medium term. In this context, we will focus in particular on geopolitical developments, exchange rate and energy price developments, and the pass-through of our monetary policy measures.
Turning to the monetary analysis, recent data indicate a pick-up in underlying growth in broad money (M3), although it remains at low levels. The annual growth rate of M3 increased to 3.1% in November 2014, up from 2.5% in October and a trough of 0.8% in April 2014. Annual growth in M3 continues to be supported by its most liquid components, with the narrow monetary aggregate M1 growing at an annual rate of 6.9% in November.
The annual rate of change of loans to non-financial corporations (adjusted for loan sales and securitisation) remained weak at -1.3% in November 2014, compared with -1.6% in October, while continuing its gradual recovery from a trough of -3.2% in February 2014. On average over recent months, net redemptions have moderated from the historically high levels recorded a year ago and net lending flows turned slightly positive in November. In this respect, the January 2015 bank lending survey indicates a further net easing of credit standards in the fourth quarter of 2014, with cross-country disparities decreasing in parallel with an increase in net demand for loans across all loan categories. Banks expect that these dynamics will continue in early 2015. Despite these improvements, lending to non-financial corporations remains weak and continues to reflect the lagged relationship with the business cycle, credit risk, credit supply factors and the ongoing adjustment of financial and non-financial sector balance sheets. The annual growth rate of loans to households (adjusted for loan sales and securitisation) was 0.7% in November, after 0.6% in October. Our monetary policy measures should support a further improvement in credit flows.
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed the need for further monetary policy accommodation. All our monetary policy measures should provide support to the euro area recovery and bring inflation rates closer to levels below, but close to, 2%.
Monetary policy is focused on maintaining price stability over the medium term and its accommodative stance contributes to supporting economic activity. However, in order to increase investment activity, boost job creation and raise productivity growth, other policy areas need to contribute decisively. In particular, the determined implementation of product and labour market reforms as well as actions to improve the business environment for firms needs to gain momentum in several countries. It is crucial that structural reforms be implemented swiftly, credibly and effectively as this will not only increase the future sustainable growth of the euro area, but will also raise expectations of higher incomes and encourage firms to increase investment today and bring forward the economic recovery. Fiscal policies should support the economic recovery, while ensuring debt sustainability in compliance with the Stability and Growth Pact, which remains the anchor for confidence. All countries should use the available scope for a more growth-friendly composition of fiscal policies.
We are now at your disposal for questions.
ECB QE Reaction: “Disappointment” – Crude Clubbed, Gold Glistens, EUR Tumbles, EU Bond Risk ‘Rises’, US Treasuries Rally
Submitted by Tyler Durden on 01/22/2015 09:01 -0500
EURCHF is dumping
Initial kneejerk reactions have started to fade but overall Europe is ‘positive’ as EURUSD is lowerand stocks higher (excepty Germany’s DAX which is at the LoD) but Sovereign spreads are higher. Initial exuberance in US equities have been entirely erased. Treasury yields are now lower as gold and silver are bid and crude and copper sold. We’re gonna need a bigger bazooka Mr.Draghi…
- SPANISH 10-YEAR BOND YIELD DROPS TO RECORD-LOW 1.465%
Europe positive for now…
Though DAX seems undecided…
US equities’ exuberance fades
as Treasuries rally…
Gold and Silver up, Crude and Copper down…
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