ECB launches mammoth quantitative easing program

Enrique Díaz-Álvarez22/Ιαν/2015Currency Updates

Two-and-a-half long years after Mario Draghi declared he would do “whatever it takes” to protect the Euro, the European Central Bank (ECB) has finally delivered. Global markets have been speculating for months about the timing, structure and size of the ECB’s bond buying scheme, and today, Draghi finally announced the launch of his quantitative easing “bazooka”.

As expected, the benchmark interest rate was left unchanged at 0.05%. What was unexpected, however, was the enormity of the bond-buying scheme. Starting March of this year, the central bank will purchase public and private sector securities to a total of €60 billion a month; far greater than the €50 billion total that the markets had priced in. The quantitative easing program will be conducted until the end of September 2016, or longer if inflation fails to rise back to the target, and could amount to 1.2 trillion Euros or more. The size of the programme will be a welcome boost to the Eurozone economy. Currently growth is stagnant and inflation will remain low in the coming months, although is expected to “increase gradually later in 2015 and 2016” according to Draghi.

On the negative side, and in a concession to Germany who actively opposed the scheme, only 20% of the additional asset purchases announced will be subject to a regime of risk sharing. In other words, 80% of bond-purchases will therefore be undertaken by national central banks. 20% risk sharing is better than no risk sharing, but this concession extracted by Germany underscores the lack of commitment to a Eurozone-wide fiscal policy and this weighs on the Euro.

The market reaction to the announcement was volatile. EUR/USD was down sharply, falling by 1.5%, with the Euro declining to a seven year low on the Pound. This is the logical reaction to a program that amounts to the creation of a massive volume of new Euros. We expect considerable downward pressure on the Euro in the weeks and months to come.


Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.