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European Central Bank starts $1.2-trillion monetary stimulus

European Central Bank starts $1.2-trillion monetary stimulus
The European Central Bank has hit the launch button on its 1.1 trillion euro ($1.2 trillion) stimulus programme by starting to buy government bonds.

The chief monetary authority for the 19 countries that use the euro confirmed on Monday it had begun the purchases, which aim to make credit cheaper, boost growth and raise inflation. ECB President Mario Draghi had announced the start date last week, sending stocks higher and the euro lower. The bonds are bought from banks and other financial institutions using newly printed money. Among the ECB's chief concerns is low inflation - which at negative 0.3 per cent annually is a sign of the economic weakness that has plagued the currency union as it struggles with high government debt.

The ECB has said it will buy 60 billion euros per month in government and corporate bonds through September 2016, and in any case until inflation turns convincingly upward toward the bank's goal of just under 2 per cent. Yields on government bonds have already fallen in anticipation of the programme's start. Some eurozone government bonds are trading at negative yields, meaning investors pay that government for loaning it money.

One key effect of the programme is expected to be a weaker euro, which would help eurozone exporters. More euros in circulation help drive down the currency's value, as expressed by its exchange rate.

Low or negative interest rates encourage investors to invest in a currency where rates are higher, such as the US German 10-year government bonds are now trading at yields of just 0.29 per cent, while 10-year US Treasurys yield 2.22 per cent.

The euro traded at $ 1.09 on Monday, well down from just under $1.40 in May, 2014. Some analysts think it could be headed for parity — one euro for one dollar. 
AP

AP

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