5 Things to Remember About the ECB's QE Program


It’s another D-day for the euro, as ECB Governor Mario Draghi lived up to market expectations and unveiled a massive quantitative easing program. Here are the important things you need to remember from this announcement.

1. Asset purchases of 60 billion EUR per month

First and foremost, let’s marvel at the sheer size and scale of the program. Draghi declared that, starting March this year until September 2016, the ECB would conduct asset purchases of 60 billion EUR each month comprising government debt and private debt. That amounts to more than 1.1 trillion EUR in extra liquidity being pumped into the market. Talk about makin’ it rain!

And that’s not all… This quantitative easing program will be combined with an existing targeted LTRO that involves buying private debt and channeling hundreds of billions of euros in cheap loans to banks. That’s on top of the two rounds of rate cuts announced by the ECB late last year.

2. ECB will take only 20% of the risk

The amount of stimulus being doled out by the ECB suggests that Draghi and his men are dead serious about warding off deflation and boosting economic growth, but what’s interesting to note about their QE plans is that the ECB will only be taking on 20% of the risk while the bulk of the purchases will be shouldered by the central banks of each member nation. So in the event that a particular euro zone government defaults on its debt, the central banks of the member nations will suffer the brunt of the losses!

In addition, these national central banks will have to buy bonds in proportion to its “capital key”, which means that larger and richer euro zone countries such as Germany will be conducting larger purchases compared to smaller member nations.

3. QE decision met with plenty of opposition

As you’ve probably guessed, a lot of euro zone officials were displeased about the announcement and it’s no wonder that German Chancellor Angela Merkel is leading the opposition. After all, the German economy seems to be faring pretty well on its own and it seems unfair that this would force them to have a bigger burden compared to smaller euro zone nations.

According to former ECB policymaker Athanasios Orphanides, it would be counterproductive to shift these monetary policy risks to national central banks instead of promoting solidarity. He even added that this could wind up leading to the break-up of the euro region.

4. Euro zone governments still need structural reforms

In response to critics of the ECB’s QE program, Draghi reiterated that structural reforms among euro zone governments are needed to ensure that the stimulus plan would translate to economic progress. After all, the ECB seems to have used up all the monetary policy tools in its arsenal and may need to rely on more support from national governments.

“It’s now up to the governments to implement these structural reforms,” Draghi explained. “The more they do, the more effective will be our monetary policy.”

5. More downside for the euro?

Even though most forex market watchers had already been expecting some form of quantitative easing from the ECB this week, the actual announcement still resulted to a bloodbath for the euro. The shared currency plummeted against all its major counterparts, with EUR/USD crashing below the 1.1400 mark and EUR/JPY tumbling below 135.00.

For now, the euro’s depreciation might actually be good for inflation, which suggests that the ECB would welcome further declines. However, should debt problems start popping up again, euro zone nations could be in big trouble and the existence of the euro might be once again put into question.

Recommended Content


Recommended Content

Editors’ Picks

USD/JPY drops toward 142.00 ahead of BoJ policy decision

USD/JPY drops toward 142.00 ahead of BoJ policy decision

USD/JPY has turned south, approaching 142.00 in the Asian session on Friday. Markets turn risk-averse and flock to the safety in the Japanese Yen while the Fed-BoJ policy divergence and hot Japan's CPI data also support the Yen ahead of the BoJ policy verdict. 

USD/JPY News
AUD/USD bears attack 0.6800 amid PBOC's status-quo, cautious mood

AUD/USD bears attack 0.6800 amid PBOC's status-quo, cautious mood

AUD/USD attacks 0.6800 in Friday's Asian trading, extending its gradual retreat after the PBOC unexpectedly left mortgage lending rates unchanged in September. A cautious market mood also adds to the weight on the Aussie. Fedspeak eyed. 

AUD/USD News
Gold price treads water below record peak, awaits Fedspeak

Gold price treads water below record peak, awaits Fedspeak

Gold price hovers below the all-time peak touched earlier this week amid a bearish US Dollar and rising bets for more upcoming rate cuts by the Fed. Concerns over an economic downturn in China keep the safe-haven Gold price afloat. Fedspeak remains on tap. 

Gold News
Bank of Japan set to keep rates on hold after July’s hike shocked markets

Bank of Japan set to keep rates on hold after July’s hike shocked markets

The Bank of Japan is expected to keep its short-term interest rate target between 0.15% and 0.25% on Friday, following the conclusion of its two-day monetary policy review. The decision is set to be announced during the early Asian session. 

Read more
XRP eyes gains as Ripple gears up for stablecoin launch, Grayscale XRP Trust notes rising NAV

XRP eyes gains as Ripple gears up for stablecoin launch, Grayscale XRP Trust notes rising NAV

Ripple (XRP) gained 2.3% since the start of the week. The altcoin’s gains are likely powered by key market movers that include Ripple USD (RUSD) stablecoin, Grayscale XRP Trust performance and the demand for the altcoin among institutional investors.

Read more
Moneta Markets review 2024: All you need to know

Moneta Markets review 2024: All you need to know

VERIFIED In this review, the FXStreet team provides an independent and thorough analysis based on direct testing and real experiences with Moneta Markets – an excellent broker for novice to intermediate forex traders who want to broaden their knowledge base.

Read More

Majors

Cryptocurrencies

Signatures