The European Central Bank’s bond-buying programme does not formally start until Monday but bank chief Mario Draghi said the very decision to embark on the plan had succeeded in putting a floor under inflation expectations.
While adopting a stern line on demands from Greece for a resumption of regular ECB support for its banks, Draghi said the ECB’s move in January to pursue quantitative (QE) easing has also improved the outlook for growth around the euro zone.
Other factors at work include the reduction in the price of oil and the euro's weakness vis-à-vis other major currencies, which itself has been fanned by the QE plan. The ECB's new forecast suggests GDP in the euro zone will accelerate by 1.5 per cent in 2015, 1.9 per cent in 2016 and 2.1 per cent in 2017.
Zero inflation is foreseen this year, the outwork of the declining oil price and miles off the official target of below but close to 2 per cent. Yet annualised inflation is forecast to rise to 1.5 per cent in 2016 and 1.8 per cent in 2017, which would be near enough to the official target.
Despite these improvements, Draghi said the ECB would still proceed with is programme to spend €60 billion a month on sovereign bonds every month until September 2016 and continue “if needed” with the bond- buying campaign if the desired result is not achieved.
“At this point in time we see absolutely no reason to think, or plan, or act in any different way from what we’ve planned,” he said at yesterday’s gathering of the ECB governing council in Nicosia.
“The risks surrounding the economic outlook for the euro area remain on the downside but have diminished following recent monetary policy decisions and the fall in oil prices.”
Irish bonds
The ECB is expected to soak up between €500 million and €700 million of Irish bonds a month under the QE scheme, which is cast to avert threatened deflation and jump-start the stagnant European economy.
The interest the Government pays on bonds acquired by the ECB will eventually find its way back to the exchequer via Central Bank dividends. This is but one of a number of benefits to be derived from the initiative.
Indeed, the onset of QE has already compressed Irish borrowing costs in financial markets to a record low, with a similar impact seen in the borrowing costs of most other euro zone countries.
The anticipated gain to the Irish public finances from all of that is clear enough: the voluminous cost of servicing the still-growing national debt is coming down a degree, providing the Government a little elbow room on taxation and expenditure.
But there is more. The weakness of the euro which follows QE is a boon to Irish exporters as magnifies the benefit of revenue taken in dollars, sterling and other global currency,
From the Irish perspective, a deeper benefit still would come from the increase in European growth anticipated as the ECB pumps about €1 trillion newly-printed cash into the euro zone until autumn 2016 at the earliest.
