Via Independent : What is quantitative easing? Quantitative easing (QE), a form of monetary stimulus, was introduced in 2015 by the European Central Bank to help kick start the then moribund eurozone economy and boost inflation.
It involves creating cash to buy sovereign and corporate bonds. Experts argue QE has been good for Ireland as it has helped keep borrowing costs low, although some disagree. Last week, credit ratings agency Moody’s singled out Ireland as one of the eurozone’s chief beneficiaries of QE, although stockbrokers Davy said the analysis was too simple.
If it has been good, why end it?
Because the eurozone economy has been growing strongly, and there has been speculation about the need for the ECB to start “normalising” its monetary policy. But inflation remains below target. In an attempt to strike a balance, the ECB announced in October it was going to cut its bond buying programme to €30bn a month from €60bn, as of January. But it extended the scheme’s lifespan by a further nine months, signalling to investors that despite strong growth, work must continue as inflation remains low.
What has the ECB said about interest rates? Might it look to increase rates if the bloc’s economy is improving?
The ECB has so far kept its interest rate on hold and has reaffirmed its guidance to keep them unchanged until well after its bond buys end. So that’s good news for homeowners here, particularly those on trackers. So it is likely to be 2019 at the earliest before any interest rate hike occurs.
Why does all this matter now?
The debate has begun about normalising monetary policy in the eurozone. It’s now a matter of when. The ESRI has warned that when QE does end and interest rates eventually rise, it will be bad for heavily indebted Irish households and firms. The think tank warned that QE has allowed banks to lower their cost of financing, and increase lending margins. If this ended, this would increase the cost of financing to the State, as well as the cost of funds to banks. The ESRI says this could act as a limiting factor on lending. If and when the ECB increases interest rates, the ESRI says this could increase the cost of new loans, but also make existing debt harder to service for borrowers. Higher borrowing costs, if passed by banks to borrowers, will affect their ability to pay back their loans and to spend in the economy. The ESRI also warned it could lead to higher levels of loan defaults.
Has the ESRI anything good to say?
It is forecasting growth of 5pc for this year and 4.2pc next year, despite concerns about Brexit. It is also forecasting unemployment to dip below 5.5pc by the end of next year. But it does warn that there is unlikely to be enough people among the unemployed to meet future demand in the labour market.