ECB begins €1.1trn stimulus programme
The European Central Bank has launched its €1.1trn stimulus programme by starting purchases of government bonds.
The chief monetary authority for the 19-countries that use the euro confirmed today that the purchases had begun. ECB president Mario Draghi had announced the start date last week, sending stocks higher and the euro lower.
The bonds are bought from banks and other financial institutions using newly-printed money. The goal is to raise the rate of inflation, which the bank considers too low at negative 0.3%.
Low inflation is one sign of the economic weakness that has plagued the currency union as it struggles to get over its troubles over government debt. The bond purchases are to run until at least September 2016.
The ECB has said it will buy €60bn per month in government and corporate bonds until next September, and in any case until inflation turns convincingly upwards towards the bank's goal of just under 2%.
Yields on government bonds have already fallen in anticipation of the programme’s start. Some eurozone government bonds are trading at negative yields, meaning investors pay that government for loaning it money.
One key effect of the programme is expected to be a weaker euro, which would help eurozone exporters. More euro in circulation helps drive down the currency’s value, as expressed by its exchange rate. Low or negative interest rates encourage investors to invest in a currency where rates are higher, such as the US.
German 10-year government bonds are now trading at yields of just 0.29%, while 10-year US Treasury bonds yield 2.22%.
The euro traded at 1.09 US dollars today, well down from just under 1.40 US dollars in May last year.
Some analysts think it could be heading for parity – one euro for one dollar.
