As expected, the European Central Bank Thursday launched a massive program of bond-buying to support the Eurozone economy and stop the 19-country currency union falling into a destructive spiral of deflation.
President Mario Draghi told his regular press conference that the ECB would expand its current, limited programs of buying private-sector bonds and buy up to a total of €60 billion ($69 billion) a month through September 2016, or as long as it takes to drive away the threat of deflation.
The program “will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term,” Draghi said. That compares with a rate of -0.2% in December.
The program breaks beyond any doubt the taboo over government bond-buying that has constrained the ECB since the Eurozone debt crisis erupted in 2010. At €1.14 trillion ($1.3 trillion) between March and September 2016, it’s also much bigger than leaks over the last month had led financial markets to believe. Consequently, the euro fell over a cent to a new 12-year low against the dollar. By 1145 Eastern Time, it was trading at $1.1423, down over 1.5% on the day.
Other European markets also enjoyed a sugar rush from the announcement: Germany’s benchmark stockmarket index, the DAX30, hit an all-time record high, as a cheaper euro is good news for export-heavy German industry.
Although Draghi said that lowering the euro’s exchange rate wasn’t his aim, the euro’s drop is likely to expose the ECB to accusations of further stoking a global ‘currency war’.
“We’re in a currency war,” Goldman Sachs chief executive Gary Cohn told the World Economic Forum in Davos earlier Thursday. “One of the easier ways to stimulate your economy is to weaken your currency.”
Draghi said there was a “large majority” to trigger the program immediately, indirectly confirming that a minority (almost certainly led by the two Germans on the ECB’s governing council) had dissented against the decision.
The Frankfurt-based ECB was forced to make some concessions to (mainly German-led) objections to the buying of government debt.
Most of the bond-buying will be done by national central banks, and the ECB will only underwrite potential losses on bonds issued by European institutions such as the European Investment Bank or the Eurozone’s bailout vehicle. As such, if a country is forced to leave the Eurozone in the future and is unable to repay euro-denominated debt, then the losses will stay with the national central bank concerned.
Draghi also warned that the measures taken today would only be effective if Eurozone governments did their part in pushing through reforms to revive growth. German Chancellor Angela Merkel has repeatedly voiced concern that too much generosity from the ECB would relieve the pressure on governments elsewhere to enact such reforms (although she pointedly omitted any criticism of it in a speech in Davos Thursday).
In addition, the ECB also scrapped the 0.10% percent premium over its main rate that it was charging for the ultra-long-term loans it has been offering for the last four months, known as TLTROs.
CORRECTION: The original version of this story incorrectly stated the start date and thus the total value of the program. The article has been corrected to reflect that.