HOW MUCH?
The European Central Bank has finally decided to use a policy tool that has already been employed by the U.S. Federal Reserve, the Bank of Japan and the Bank of England. It will buy a mix of government and other bonds at a rate of €60 billion a month until September 2016 at least, and possibly for longer, using freshly created money in an effort to reverse a fall in consumer prices that began in December, and raise the inflation rate towards its 2% target.
WHAT IS IT?
Known as quantitative easing (QE), the policy is employed when interest rates have hit zero and is an alternative way of providing monetary stimulus. The policy is intended to work by lowering long-term interest rates, thereby encouraging investment, which has been very weak in the euro-zone. It also signals to consumers and businesses that the central bank is committed to reaching its inflation target. Raising inflation expectations is another way of lowering the real interest rate.
WAS THERE CONSENSUS?
The 25-member governing council’s wasn’t unanimously in favor of the new program. While the vote breakdown will not be published, it’s likely the decision was opposed by the two German members, and possibly others. German policy makers don’t believe there is a risk of deflation in the euro-zone, while Germans also worry that QE is a form of central bank financing of government deficits, a taboo in the euro-zone’s largest members. German policy makers also fear it will ease pressure on governments to press ahead with painful economic reforms.
HOW WILL IT WORK?
Each of the 19 central banks in the euro-zone will buy bonds issued by its own government, and take the losses should that government default. That’s intended to prevent taxpayers in one country from taking a hit from debt problems in another, but critics say it raises questions about the coherence of the euro-zone, revealing deep, underlying splits within the currency area.
HOW WILL IT HELP?
One immediate way that QE may aid the euro-zone’s economic revival is by pushing the euro lower against other major currencies, or at least ensuring its depreciation since May isn’t reversed. That could help exporters and increase output, while it could also help raise inflation by making imported goods and services more expensive in euro terms.
Click here to see charts that explain the above: http://on.wsj.com/1BiLtBw
(Source: WSJ)
