An insurance policy rather than a miracle cure
On 22 January, the European Central Bank announced a new asset purchase programme that was more extensive than the market's expectations. The programme will amount to €60 billion per month from March 2015 to September 2016 (i.e. an aggregate amount of €1,140 billion) and can be extended beyond that date, until the point when the medium-term inflation outlook is sufficiently close to 2%
Taking the size of the eurozone into account, the scale of this programme is not far removed from the last two programmes of the same kind implemented in the United States between 2010 and 2014 (under the acronyms of "QE2" and "QE3"). However, the likely impact on the price of assets and on the economy could be less significant for several reasons.
First, the margin for reducing long-term interest rates is more limited: before the launch of this programme, the 10-year rate was around 0.5% in Germany and 0.7% in France, whereas it was still around 3% in the United States at the beginning of QE2 and around 2% at the beginning of QE3. It is nonetheless true that the margin for a decrease in long-term interest rates is greater in peripheral European countries, due to the fact that their rates are markedly higher than those in the core countries.
Second, the knock-on effect of this policy via an increase in the price of so-called high-risk assets (equities, corporate bonds, and securitisations, etc.) will necessarily be less significant in the eurozone than in the United States due to the smaller role played by these assets in financing the economy and in households' wealth (lower wealth effect). Specifically, the Fed's purchases of mortgage-backed securities in the United States played a key role providing support to the housing market.
There is also the exchange rate channel: indeed, the excess supply of euros created in this way, combined with the negative interest rate (-0.2%) for the excess cash deposited at the ECB, should encourage the investment of capital in other currencies, in order to achieve more attractive yields. This is what we are already seeing in the case of the euro/US dollar exchange rate (which has fallen back to its lowest level since 2003), especially since the markets are expecting the US Fed to begin raising interest rates in the second half of this year. However, the euro will find it hard to significantly depreciate compared with other currencies than the US dollar, either because some Central Banks are implementing monetary policies that are at least as aggressive as the ECB's policy (like in Japan), or because some countries (primarily emerging markets) are facing a net deterioration in their macro-economic position.
Overall, the asset purchase programme announced by the ECB should be compared to an insurance policy, rather than to a miracle cure: it will not trigger a strong and sustainable acceleration in growth in the eurozone on a stand-alone basis, although it will significantly reduce the risk of it falling into a deflationary spiral.
Olivier Garnier, Group Chief Economist