Mario Draghi led the European Central Bank (ECB) into a new era with an historic pledge to buy government bonds as part of an asset-purchase programme worth around €1.1 trillion ($2.3 trillion). The ECB president side-stepped German-led opposition to quantitative easing (QE) in a once-and-for-all push to revive inflation and the euro-area economy.
The central bank will buy €60 billion per month of securities until September 2016. The ECB also reduced the cost of its long-term loans to banks. A near-stagnant economy and the risk of deflation forced Draghi’s hand six years after the US Federal Reserve took a similar step to inject cash into the US.
The 67-year-old Italian’s gamble is that the benefits of quantitative easing outweigh the threat of a backlash in Germany and that the ECB ends up bailing out profligate, reform-wary governments.
Draghi said 20 percent of the asset purchases would be subject to risk-sharing, suggesting the bulk of any potential losses will fall on national central banks. Critics say that calls the euro zone concept of risk sharing into question and countries with already high debts could find themselves with further liabilities.
The ECB’s shift exacerbates an emerging global divergence in monetary policy. While the Fed is now considering when to tighten credit, central banks in Denmark, Turkey, India, Canada and Peru all announced surprise rate cuts. The Swiss National Bank shocked investors by dropping a cap on the franc.