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What are the key features of quantitative easing (QE) and what are its likely effects in the eurozone, following the European Central Bank's (ECB's) announcement of an expanded asset purchase programme?
Expanded EUR 60bn asset purchase programme launched by ECB: an expanded asset purchase programme aimed at fulfilling the ECB's price stability mandate has been an-nounced by the ECB's governing council. The purchase of sovereign bonds will be added to the ECB's ex-isting private sector purchase programmes in order to address the risks of a too prolonged period of low inflation.
QE is the creation of (or printing of) money by central banks to buy sovereign bonds with the aim of spurring growth and inflation--central banks create new bank reserves to buy assets from financial institutions. Central banks acquire the bonds and the banks get money in return for those bonds, which they can then use (in theory) to extend credit to households and businesses.
QE should increase the supply of money, which in turn keeps interest rates low (inter-bank interest rates drop because the banks have more financial options following the injection of money). This then encourages borrowing (ie cheaper credit) and spending (rather than saving) which boosts the economy of, and confidence in, the eurozone. Lowering the cost of borrowing should encourage banks to lend and eurozone businesses and consumers to spend more, therefore contributing to economic growth.
The ECB said the QE was prompted to address the risks of too prolonged a period of low inflation. The eu-rozone has been suffering from deflation, creating a risk that growth and economic recovery would stall as businesses and consumers held off making purchases while waiting to see if prices fell further. It is hoped QE will trigger inflation and buoyancy within the eurozone.
In July 2012, the ECB reassured markets that it was prepared to do whatever it takes to maintain financial stability in
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