The European Central Bank (ECB) recently just launched this programme, years after the United States successfully implemented its version. It is called “Quantitative Easing” (QE) and it could be the next big thing for financial markets around the world.
It’s easy to understand how this works. Central Banks can control the supply of money in every economy by buying or selling government bonds as well as tweaking interest rates. As part of monetary policy, a central bank can promote growth by buying these bonds and lowering the short-term interest rates as a result, money supply would increase in this scenario. However, when the interest rate is already at zero or close to zero (and this was the order of the day in the wake of the 2008 global financial crises), this approach loses validity and banks have to find creative ways to stimulate the economy.
The flip side of this is the potential to raise inflation. This is because more money now chases the same amount of goods. Also, there is the risk of currency devaluation. Therefore, QE is usually only considered when conventional monetary policy has failed, short-term interest rates are at or approaching zero, and does not involve the printing of new banknotes.
The ECB launched its QE Programme as a way of boosting economic activities within the Eurozone. The bank hopes to push inflation rates upwards at the end of last year to at least 2 percent. This financial innovation played a big role in getting a number of countries out of the global financial crisis. Apart from the U.S Federal Reserve and the ECB, the Bank of Japan has also adapted this approach.
Experts at Davos last week agreed that some of the biggest structural risks are centred around Europe and the Middle East. This is due to crashing oil prices and the dire need for structural reforms in the European Union (EU). Global uncertainties may not end anytime soon, hence unconventional strategies like “Quantitative Easing” may continue to feature in major financial markets around the world for some time.
By Emmanuel Iruobe