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ECB to inject €1.1trn into the Eurozone

Bond and share prices surged as soon as Mario Draghi revealed details of the central bank's programme

23 January 2015

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Bond and share prices surged as soon as Mario Draghi revealed details of the central bank's programme

The European Central Bank (ECB) will begin a quantitative easing programme in March 2015 where it will buy €60bn worth of assets every month.

The ECB will buy a variety of assets ranging from European government and agency debt and bonds. The programme will run until at least September 2016.

The ECB's main goal is to increase the persistently low level of euro inflation back up to two percent, which has been hurting the currency's value for almost a decade.

President of the ECB, Mario Draghi, said: "Expectations work only if there is certain credibility…today we are showing that that credibility is deserved."

Marino Valensise, head of the global multi asset group, Baring Asset Management, is optimistic that the move will be positive for private clients with bond investments.

"The announcement should be positive for stocks given bond yields will remain low. However we think most of the positive impact in the short term will be felt in the bond markets. Other income-generating assets such as high dividend stocks will benefit as income will be in demand," he said.

He continued: "We believe this announcement is supportive for bonds given the broad scope of the programme. We expect the risk premium attached to peripheral European government bonds versus German bunds to remain well behaved".

Hyperinflation

There have been some suggestions that due to the large sums of the money the ECB will inject into the economy, inflation could rise well above the desired two per cent threshold and create an environment of hyperinflation.

Draghi dismissed these fears as he unveiled the programme and Valensise agrees that this is very unlikely to happen.

"We concur with Mr Draghi's sentiment that QE [quantitative easing] is unlikely to lead to hyperinflation. The ECB has been easing policy for years, and inflation has remained persistently low, suggesting that monetary action taken to date has not been sufficient to shock the economy onto a higher growth and inflation trajectory.

"The experience of QE in the United States also supports this view. Whether Mr Draghi's QE 'bazooka' will finally achieve this goal now remains to be seen," he concluded.

 

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