ECB unveils 'bazooka' plan to purchase €60bn a month in sovereign bonds

The European Central Bank (ECB) has announced a huge new quantitative easing programme, with €60bn of public and private sector asset purchases for at least 18 months from March 2015.

ECB President Mario Draghi said the €60bn monthly total will include existing central bank bond purchase programmes, which amount to roughly €10bn per month, meaning the announcement was roughly in line with expectations.

Totalling at least €1trn, the bond-buying scheme is the equivalent of just over 10% of euro-zone gross domestic product, economists noted, making it close in size to the initial bouts of QE undertaken by the US Federal Reserve and the Bank of England.

This should achieve the ECB's previously stated aim of re-expanding its balance sheet to 2012 levels.

As the size of the programme met recent forecasts, market reaction was relatively muted, with stock markets rallying slightly on the announcement and then falling back, and the euro left marginally weaker.

Versus the dollar the euro, which had been trading at $1.1629, before sliding to $1.1468 in mid-afternoon, down 1.29% against, creating fresh 11-year lows.

Jonathan Loynes, chief European economist at Capital Economics, noted that the purchases will consist of both investment grade sovereign debt and the debt of “agencies and European institutions” and that the ECB will abandon the traditional 'loss-sharing' of its monetary policy operations.

"In other words, the risks will remain with national central banks, as had been mooted over recent days. This will surely limit the beneficial effects on the indebted peripheral countries."

"Overall," Loynes said, "the fact that peripheral bond yields have fallen in response to the announcement suggests that, initially at least, the size and open-endedness of the programme is trumping concerns about the lack of risk-sharing.

"But we would caution again that even sizeable amounts of QE are unlikely to transform the outlook for the euro-zone economy and eliminate the risk of a prolonged and damaging bout of deflation."

Yoram Lustig, at fund manager at AXA Investment Managers, said the news was the "long-awaited bazooka from the ECB", but expected equity markets range bound in the month ahead, "oscillating between fear and hope".

Christian Schulz, senior economist at Berenberg, said the move will affect the European economy in many ways, from the liquidity channel, bank lending, interest rates, asset prices and portfolio rebalancing to the exchange rate.

"But the most important channel is the impact on confidence and expectations. An impressive announcement like the one today can boost investors’ and households inflation expectations. That in turn lowers real interest rates, which makes investment more attractive and should thus boost growth.

"Ironically, if successful, QE will raise longer-term interest rates and strengthen the euro exchange rate as a side effect. This happened in the US and is what German savers have been craving for years. At the same time, the growth impact on the economies will be temporary.

"Countries with unresolved structural issues such as France and Italy risk experiencing no more than a modest relief if they fail to pursue further structural reforms."