How Long will QE continue and will Increments be increased?
Today will see the European Central Bank (ECB) interest rate decision, although I expect no movement in terms of rates, Mario Draghi the head of the ECB will have to address the current Quantitative Easing (QE) Program. QE is essentially pumping money into an economy in order to stimulate growth. The current program has €80bn being injected into the Eurozone per month and this is due to end in March. One of the key threats to the Eurozone is deflation. Deflation can be catastrophic to an economy as it discourages spending, when spending is exactly what is required to solve the problem.
QE is in place in an attempt to boost inflation, it has not had the desired effect with inflation teetering on the point of deflation. To end the current QE program in March would be almost unimaginable. Draghi will have to lengthen the program and possibly increase monthly increments. By how long and by how much will be the key factor in determining GBP/EUR rates today.
I recall the last time there was an increase in QE, it was larger than expected and lengthened which should have caused significant Euro weakness. But, instead of the market reacting to change in monetary policy as it should I was shocked to see significant sell offs held back by Draghi’s speech after the announcement. Investors trusting a banker’s word over a change in monetary policy baffled me. It will be interesting to see what occurs later today.
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