AFP, Frankfurt :
European Central Bank policymakers are set to discuss Thursday whether to withdraw their mass-bond-buying programme later this year, in a major vote of confidence – but also a risk – for the eurozone economy.
Here are five things to know about what the so-called “quantitative easing” (QE) programme is and why the decision matters for the 19-nation single currency area.
President Mario Draghi announced in January 2015 that the ECB would expand its interventions in financial markets with mass bond-buying.
After the financial crisis, the central bank’s previous attempts to lift inflation towards its target of just below 2.0 percent – smaller asset purchase programmes and lower interest rates – had not done the job.
Steady inflation is seen as vital for healthy economic growth as it wards off deflation, or a spiral of decreasing prices that encourages people to hoard money rather than spend it.
QE is shorthand for the central bank creating money and using it to buy government bonds or other financial assets on the open market.
The aim is to encourage investors to move cash out of low-risk holdings like bonds and seek returns elsewhere, for example by lending to households and businesses.
In turn, those people and firms will spend money, powering economic growth and, so the theory goes, inflation.
As it manages a currency shared between 19 countries, the ECB’s programme faces more constraints than those at the Federal Reserve in the United States, the Bank of England or the Bank of Japan.
The most important of these is a ban on the ECB buying too many of any one country’s bonds, designed to avoid accusations of “monetary financing” – or the central bank footing the bill for government spending.
Some observers argue the central bank is approaching these limits, while others believe it can find more wiggle room to continue if needed.
QE has made it easier for eurozone companies, households and states to borrow money, saving them billions on interest payments.
Eurozone growth hit its highest level since 2007 last year, at 2.3 percent, while unemployment has fallen to its lowest levels in ten years, at 8.5 percent in March.
