After months of debate, and having exhausted all the alternatives, the European Central Bank (ECB) announced on 22 January that it was finally introducing a big programme of quantitative easing (QE).The European Central Bank will inject at least €1.1 trillion (£834bn) into the ailing Eurozone economy. The ECB will buy €60bn bonds each month from banks until the end of September 2016, or even longer.The landmark move, to stave off a devastating bout of deflation and boost Eurozone growth sent the Euro tumbling. The Euro dropped to an 11- year low against the US dollar at $1.14, and a 7-year low against the pound at £0.76.
The markets had long been expecting the ECB to introduce QE. Eurozone recovery since the double-dip recession in the acute phase of the euro crisis has been weak and faltering. Eurozone inflation fell to 0.4%, far short of the central bank’s target of close to 2%. After much hesitation and amid intense controversy, ECB president Mario Draghi signaled the start of QE.
The policy has been tried before in the UK, United States and Japan. In the UK and U.S., the policy has been deemed successful; in Japan, however, opinion is fiercely divided.
The biggest hurdle to overcomefor Draghi and team is the disparate economic health of the 19 member EU states, which makes a one-size-fits-all policy approach potentially less effective.From a trickle-down perspective, the effect of QE on average Europeans could be less than that experienced in the U.S. because long-term interest rates, which QE is supposed to lower, are already low in Europe. Structural economic issues plaguethe EU and if the stimulus doesn’t work, it could mean the end of a single currency.
These new measures unveiled by ECB could help revive the economic situation in the Eurozone, but it has created an uncharted investment environment. The transition back to normal will notbe a smooth ride. Talk to one of Dino Zavagno’s team at Gladstone Morgan to discuss a diverse set of investment strategies key to your financial goals at email@example.com
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