In Depth

Quantitative easing in the eurozone - how does it work?

The ECB is has announced a huge programme of money-creation - but what does that actually mean?

The European Central Bank (ECB) has announced a massive programme of quantitative easing (QE) for the eurozone today. The idea is to fight low inflation - and stave off the spectre of deflation.

Expectations were so high that there were warnings of "serious disappointment in financial markets" if a programme was not announced, says the BBC's Andrew Walker. In the end those fears were ungrounded as the ECB announced it would purchase €60bn of bonds per month until the end of September 2016 at least - "far more than previously expected", according to the BBC.

There have been warnings that deflation - both a symptom and a cause of economic decline - could reignite the eurozone's debt crisis, says Walker. And ECB president Mario Draghi is worried that cheaper oil could lead to what he calls the "second round effects" of deflation.

These include consumers holding-off from purchases because they expect prices to keep getting lower, and companies firing staff to cut costs and dropping prices further still in their efforts to encourage people to spend.

QE offers a solution: by buying government debts using specially-created money, the ECB can perhaps get the eurozone economies moving again. It works because buying large quantities of bonds can raise their price, which then lowers the return investors make on them.

The investors are mostly financial institutions. Lower returns should lead to them reducing interest rates, which in turn should encourage businesses to invest more and consumers to spend more.

The ECB has tried QE before - as have the UK and US in recent years - but this time it is likely to be on a bigger scale than we have seen before, says Walker.

UBS chairman Axel Weber yesterday said he expected the ECB to announce a "sizeable programme" of QE but warned it was "only part of the fix", says the Financial Times.

Weber said the danger was that the more the ECB does to help, the less pressure governments will feel to act. He insisted that governments "need to deliver policy reforms" - in other words, cut spending and implement austerity programmes.

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