In hopes of pumping up the rapidly-deflating euro — and the 19 European Union economies that it calls home — the European Central Bank has decided to start down the financial path already trod by the United States, the United Kingdom and Japan, instituting its own bond-buying programme known as “quantitative easing”, which Mario Draghi, ECB president, hinted at in his famed “big bazooka/whatever it takes” speech in July 2012.
As Draghi explained in a press conference on 22 January, the impetus for the programme’s launch is two-fold: “First, inflation dynamics have continued to be weaker than expected. … This assessment is underpinned by a further fall in market-based measures of inflation expectations over all horizons and the fact that most indicators of actual or expected inflation stand at, or close to, their historical low.
“Second, while the monetary policy measures adopted between June and September last year resulted in a material improvement in terms of financial market prices, this was not the case for the quantitative results.”
Draghi added that current monetary accommodations were not adequate to address the risk posed by prolonged periods of low inflation, and that further measures would be necessary for the ECB to achieve its price stability objective, as the key ECB interest rates have reached their lower bound.
The programme itself will inject at least €1.1 trillion into the euro zone economy through €60 billion monthly bond purchases by the ECB that will last until at least September 2016, though the ECB expects the programme to “be conducted until we see a sustained adjustment in the path of inflation that is consistent with our aim of achieving inflation rates below, but close to, 2 percent over the medium term,” Draghi added.
We knew this was coming
The OECD recommended quantitative easing for the euro area last October, stating that the ECB’s policies over the summer of 2014, which included the introduction of a negative interest rate, were welcome but were not enough, and that European countries “should use the full degree of flexibility available within the EU’s fiscal rules.” Rintaro Tamaki, deputy secretary-general of the OECD, added in a press conference that “the euro area needs more vigorous monetary stimulus, while the United States and the United Kingdom are rightly winding down their unconventional monetary easing.”
Since that time, the situation has got worse. The OECD recently dropped its GDP growth projections for the euro area to 1.2 percent in 2015 and 1.4 percent in 2016 after real GDP in the euro area rose by only 0.2 percent, quarter on quarter, in the third quarter of 2014, and euro area inflation was –0.2 percent in December 2014, according to Eurostat, a figure that Draghi does not expect to improve drastically in the near term.
Further detail on the December 2014 inflation rate in the 28 EU member states can be found in the “Annual inflation in the European Union” chart below. A “Flash Estimate” for euro zone inflation in January published by Eurostat on 30 January showed a further deterioration to –0.6 percent.
“On the basis of current information and prevailing futures prices for oil, annual HICP inflation is expected to remain very low or negative in the months ahead,” Draghi continued. “Such low inflation rates are unavoidable in the short term.”
Draghi added that inflation rates are expected to increase gradually in the latter half of 2015 and in 2016.
QE stimulus should benefit real estate
But the news is not all doom and gloom, especially for real estate investors looking to invest in Europe, as the new policies should lubricate capital flows and lower borrowing costs. Without QE, the market would likely be expecting a 5–10 percent increase in European investment volumes this year alongside a 20–30 basis point prime yield fall, according to Cushman & Wakefield. With a successful QE package as well as more growth and reform, Cushman & Wakefield’s forecast is increased to a 40–70 basis point yield fall and a 20 percent or greater jump in property trading.
Still, many feel that the programme itself is not enough and that deeper structural reforms by individual euro zone governments will be needed. Those committed to deeper reform, such as Spain, will see the biggest increases in activity and inward investment, Cushman & Wakefield adds.
Further complicating the matter, the bond-buying programme has, and will continue to, face varied opposition from the wide range of nations that the ECB is trying to wrap under one financial cloak.
“This play is seen by many as the last roll of the dice for the beleaguered euro,” Dennis de Jong, boss of trading site UFX.com, said to the BBC. “QE has had some success in the United States and the United Kingdom, but with such a patchwork of economies and banking systems in the euro zone, the jury is very much out.”
Germany and France have expressed reservations about the programme — and they will eventually foot the bill — but the biggest breaking of the ranks could very well come from Greece, as evidenced by its 25 January election of the anti-austerity Syriza Party, which has challenged Greece’s obligation to pay back its IMF/ECB/EU debt.
While the jury is out on how well the programme will reflate the euro, many, including Dr Richard Barkham, global chief economist with CBRE, feel that it could go a long way toward keeping interest rates suppressed in the United States.
“The move by the ECB and Japan to continue with quantitative easing will make it more difficult for the United States to buck the trend, meaning that a radical rate hike in the United States is unlikely and the near-zero rate era is likely to continue for some time,” explained Barkham, in a statement.
Sure enough, the US Federal Open Markets Committee reflected this sentiment in statements following its January meeting, stating that it “judges that it can be patient in beginning to normalise the stance of monetary policy.”
Either way, despite mixed feelings about the prospect of the programme, Draghi has fired his bazooka, and we should all hope that it hits its mark, because he likely does not have a bigger gun.