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European Central Banks Moves Towards Quantitative Easing

With inflation in the Eurozone stubbornly remaining at below 1%, less than half the European Central Banks target rate, and the threat of deflation continues to menace the EU’s economic recovery. To combat this, many have long been calling for unconventional monetary policy options such as negative deposit rates and large scale purchase of assets known as quantitative easing.

Such unconventional expansionary policies have consistently been blocked by the more conservative wings of the ECB but a major impediment to quantitative easing in the Eurozone was removed yesterday when Bundesbank head Jens Weidmann radically changed his stance and showed the first signs of support for QE. While the ECB’s rate setting government council is unlikely to immediately begin large scale purchases of private and public sector assets, this is a promising development for those hoping to utilize quantitative easing if the risk of a Japanese style deflation continues to increase. If deflation were to occur, the resulting implications could be devastating for the EU’s delicate economic condition.

Quantitative Easing consists of purchasing vast quantities of non-conventional assets in the economy to target interest rates in specific markets in the hope of driving down long term interest rates to increase investment and help stimulate the economy. Furthermore, quantitative easing can help to combat deflation by radically expanding the monetary supply. These assets are considered non-conventional because they step outside the typical purchase of treasury bonds seen in open market operations. QE was first utilized on a large scale by the Japanese central bank in the early 2000’s but was successively implemented by the Fed and The Bank of England in the depths of the 2007 recession.