Thursday, January 22, 2015

Will QE Work for ECB? (excerpt)

Today, the ECB will detail a new QE program for the explicit purpose of averting deflation. Bloomberg reported yesterday that ECB President Mario Draghi favored spending as much as €1.1 trillion through asset purchases of €50 billion a month until December 2016, according to two euro-area central-bank officials.

It will be interesting to see how the QE program will handle loss sharing. According to an article in the 1/19 FT: “It is very likely that much of the burden for losses on sovereign bonds bought under QE will lie with individual member states, though there are various ideas about the exact role the national central banks will play. The losses are set to apply should a government pursue a debt restructuring or a default. The national central banks would be obliged to buy as much of their country’s debt as the ECB orders, though they may have some freedom over the sorts of maturities they buy.”

It’s not obvious that QE will revive inflation in the Eurozone given that it didn’t do so in the US. Perhaps inflation would have moved lower in the US without QE, though I doubt it. Given that government bond yields have plummeted close to zero in the Eurozone, QE’s mission has already been accomplished in the bond market, in my opinion.

The only transmission mechanism that I see between QE and inflation is through the currency. If the euro continues to plunge as a result of the new QE program, then the Eurozone’s economy might get a lift from exports and fewer imports. That could boost inflation, I suppose. However, I remain skeptical given Japan’s recent disappointing experience with quantitative easing.

Meanwhile, inflation continues to fall in the Eurozone. Thanks to falling oil prices, the headline CPI inflation rate was -0.2% y/y during December. The core rate was 0.7%.

Today's Morning Briefing: QE Futility. (1) The magic inflation target. (2) IMF lowers inflation outlook. (3) Despite ultra-easy money, central banks fighting deflation. (4) Rosengren is in no rush to raise rates. (5) What does QE really do? (6) From Draghi’s whatever-it-takes to QE. (7) Canadian surprise. (8) BOJ lowers inflation forecast and its credibility. (9) BOE is unanimous. (10) Earnings have some major headwinds. (More for subscribers.)

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