Open-ended European QE set to ‘start with a bang’

European Central Bank (ECB) President Mario Draghi announced the launch of an open-ended, expanded monthly 60 billion euro ($70 billion) private and public bond-buying program on Thursday.

The long-anticipated introduction of euro zone government bond purchases will bring the ECB’s buying program into line with the U.S. Federal Reserve’s quantitative easing (QE).

The program will be open-ended, lasting until at least 2016, Draghi told reporters at his regular media conference on Thursday, and will start in March this year. The hope is that it will boost the region’s painfully low inflation rate, which came in at an annual minus 0.2 percent in December.

Explaining the ECB’s decision, Draghi said: “Inflation dynamics have continued to be weaker than expected. While the sharp fall in oil prices over recent months remains the dominant factor driving current headline inflation, the potential for second-round effects on wage and price-setting has increased and could adversely affect medium-term price developments.”

The size of the program was bigger than the 50 billion euro per month rumored prior to Draghi’s announcement.

Read More Live blog: Markets cheer European QE

Emmanuel Dunand | AFP | Getty Images Mario Draghi

Emmanuel Dunand | AFP | Getty Images
Mario Draghi

“European QE is set to start with a bang rather a whimper, a fact that will be well received by investors,” said Nancy Curtin, CIO of Close Brothers Asset Management, in a research note after Draghi’s announcement.

“The euro zone was in need of shock and awe tactics from the ECB to combat the prospect of a prolonged period of deflation, and Draghi has finally delivered on his promise to do ‘whatever it takes’.”

The ECB will purchase euro-denominated investment-grade securities only.

Twenty percent of the additional purchases will be subject to risk-sharing arrangements, designed to limit the amount of risk the ECB takes on to its balance books. The majority of risk will remain with euro zone national central banks.

No more than 25 percent of each debt issue will be purchased. The maturities of the debt purchases will range between two and 30 years.

The euro slid against both the sterling and the U.S. dollar after Draghi’s announcement.

Earlier in the day, the ECB announced it would hold its main interest rate unchanged. It kept its main refinancing rate at 0.05 percent, with the rate on its marginal lending facility at 0.30 percent. The rate on its deposit facility was held at -0.20 percent.

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