ECB QE Bond Buys Reportedly Will Hit $1.3 Trillion
04:36 PM ET
President of European Central Bank Mario Draghi is expected to speak on Thursday about a speculated $1.3 trillion bailout plan for the stalling... View Enlarged Image
The European Central Bank is poised to inject $1.3 trillion into the stalling eurozone, according to media reports Wednesday, while other central banks took surprise steps to address their own economic anxieties.
The ECB reportedly will announce Thursday that it will buy 50 billion euros of sovereign bonds per month, with a total quantitative easing (QE) program of as much as 1.1 trillion euros, or $1.3 trillion. Still unclear is how the purchases would be structured.
Separately, the Bank of Canada unexpectedly cut interest rates 25 basis points, citing the impact of plunging oil prices on growth. That followed the Swiss National Bank's shocking end last week to its currency cap vs. the euro.
The euro, which has tumbled to multiyear lows vs. the dollar on weak economic growth, and inflation and QE expectations, rose Wednesday. U.S. stocks moved up and down before closing modestly higher as investors mulled whether the ECB's looming decision has been priced in.
If reports are correct, the ECB program will top the 500 billion euros that investors have assumed, said Jacob Funk Kirkegaard at the Peterson Institute for International Economics. It would also make QE's structure less of an issue, he said.
The design of an ECB bond-buying scheme has been hotly debated and deeply politicized as eurozone leaders and central bank policymakers grapple with the realities of member states that have only diverged further since the eurozone debt crisis arose.
Germany strenuously opposes having the ECB purchase the debt of its weakest members, which have avoided hard structural reforms needed to bolster long-term growth. Other reports have suggested German policymakers have convinced the ECB to have separate national central banks buy the bonds.
"Whether purchases are mutualized or not is a little bit of a sideshow," Kirkegaard said. No matter how the buys occur, he said, the ECB balance sheet expands.
More important, he added, such a decision likely would get unanimous support from ECB's Governing Council. "It sends a strong signal that the path chosen by ECB has ultimately the political backing of not just Germany but all the euro-area members."
For David Rosenberg, chief economist at Gluskin Sheff, nothing is certain until ECB President Mario Draghi speaks Thursday.
"We're moving out of the comfort zone of years where central banks were ultra-transparent and triggered an extended period of low volatility and complacency," he said. "What we see happening in the last week tells us those days are long gone. The ECB is going to find a way to surprise tomorrow, we just don't know in which direction."
For all the angst over QE, analysts expect it to have little effect on the eurozone economy. Inflation was negative in December for the first time since 2009. Unemployment is still 11.5%, with youth joblessness nearly 24%.
Bond buying can spark financial markets' animal spirits, but not much else, Rosenberg said.
"The problems plaguing the euro area are not financial," he said. "There's nothing monetary policy can do except continue to buy time until they get their fiscal house in order."
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