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2015-12-04 13:13:19
3 December 2015
The European Central Bank has outlined further action aimed at stimulating the
eurozone economy.
One way it is trying to do so is by boosting the amount of overall money in the
banking system through something known as quantitative easing, or QE.
While the United States has wound down its programme of QE now that the economy
is growing more steadily, the eurozone only began its version in January 2015,
pledging to put an extra 60bn ($63bn) into the system each month.
What is QE?
Governments and central banks like there to be "just enough" growth in an
economy - not too much that could lead to inflation getting out of control, but
not so little that there is stagnation. Their aim is the so-called "Goldilocks
economy" - not too hot, but not too cold.
One of the main tools they have to control growth is raising or lowering
interest rates. Lower interest rates encourage people or companies to spend
money, rather than save.
But when interest rates are almost at zero, central banks need to adopt
different tactics - such as pumping money directly into the financial system.
This process is known as quantitative easing or QE.
How does it work?
The central bank buys assets, usually government bonds, with money it has
"printed" - or, more accurately, created electronically.
It then uses this money to buy bonds from investors such as banks or pension
funds. This increases the overall amount of funds in the financial system.
Making more money available is supposed to encourage financial institutions to
lend more to businesses and individuals. It can also push interest rates lower
across the economy, even when the central bank's own rates are just about as
low as they can go. This in turn should allow businesses to invest and
consumers to spend more, giving a knock-on boost to the economy.
What are the risks?
The biggest concern is that pumping more money into the economy could
ultimately lead to an inflation problem, though at present, the issue is that
eurozone inflation is too low.
When inflation is close to zero, a bit more upward pressure on prices can be
seen as a good thing. But some politicians and economists have opposed the idea
of QE in principle, because they believe in the long run, there's a danger that
it could create too much inflation.
Others argue that the extra money has just bolstered the price of some assets
such as shares and property in some countries.
Who else has tried QE?
Both the Bank of England and the US Federal Reserve embarked on QE in the wake
of the 2008 financial crisis in an attempt to stimulate economic growth.
Between 2008 and 2015, the US Federal Reserve in total bought bonds worth more
than $3.7 trillion.
The UK created 375bn ($550bn) of new money in its QE programme between 2009
and 2012.
The eurozone began its programme of QE in January 2015 and has so far pumped in
$600bn of extra money. Originally the programme was set to run until September
2016, but it has now been extended until at least March 2017.
QE was first attempted by Japan's central bank to arrest a period of deflation
following its financial turmoil in the 1990s. There is disagreement about
whether the initiative had the intended effect of stimulating the Japanese
economy.
Has QE worked?
Over the last few years, the US economy has stabilised and unemployment has
fallen steadily. Some credit QE for the recovery, at least in part.
European Central Bank governor Mario Draghi said in June 2015 that the policy
had "contributed to a broad-based easing in financial conditions, a recovery in
inflation expectations and more favourable borrowing conditions for firms and
households".
Are there any losers from QE?
QE pushes up the market price of government bonds and reduces the yield paid
out to investors. In other words, investors have to pay more to get the same
income.
The US's programme of QE also kept the value of the dollar lower than it might
otherwise have been, a factor not welcomed in some emerging economies. Since
the end of QE in the US and with the prospect of interest rate rises there, the
dollar has regained strength. The ECB's QE has led to a weakening of the euro.