Since the beginning of the crisis in 2008, the main tasks of central banks in the developed world have been to avoid a scenario of deflation and stimulate economic growth. Both the Federal Reserve (Fed) and the European Central Bank (ECB) and the Bank of Japan (BoJ) have lowered their interest rates to historic lows, and remained there for an extended period.
Additionally, the Fed and the BoJ have expanded their balance and injected unusual amounts of liquidity into the economy by printing circulating intended for repurchase of various financial assets. For the US, the economic situation has improved enough that the Fed has put an end to his monetary expansion program late last year, and most likely start raising interest rates this year.
In the case of Japan, the threat of deflation and stagnation have detonated a much more aggressive stance of the BoJ, which has increased its liquidity injection program considerably. For Europe the story was different. While at the beginning of the crisis in 2008 the ECB acted decisively to prevent freezing of the financial system, lowering rates and injecting liquidity into the markets, in recent years the European Central Bank has taken a more conservative stance the Fed and the BoJ.
In 2011, the ECB was already restricting its monetary policy by raising rates, and by mid-2012 had begun to significantly reduce the size of its balance . The combination of a shy monetary policy with strong fiscal austerity measures and lack of structural reforms, in much of the eurozone have made a new scenario looming recession and deflation.
The very poor growth Eurozone in 2014 and the fact that December inflation figures have confirmed deflation for the first time since October 2009, the ECB makes imminent finally take a more aggressive stance.
This week is key, as the ECB concludes its first policy meeting Thursday. According to the Financial Times survey, 26 of 32 economists surveyed expect the ECB to take a page for the Fed and announce a massive program of liquidity injections American style QE. This perception has also been fueled by comments from Mario Draghi, president of the organization, which has stated that the program of injections may increase the central bank balance sheet by 1,000 million euros and include sovereign bonds.
Without But there are two outstanding questions. The first is whether Draghi will finally get the support of the Germans, who in the past have been reluctant to take such measures. The fact that the European courts have declared that the measures taken by the ECB during the crisis were constitutional, he disempowers German critics, and increases the likelihood of this happening.
The other question is how much impact will this stimulus program in the European economy. For many, the impact of this new QE could be limited if it is not accompanied by a coordinated fiscal stimulus or if its implementation is timidly plan.
The channels most obvious transmitted to the real economy are: i) through a decline in interest rates on sovereign bonds of heavily indebted countries, enabling them to lower their borrowing costs and perhaps use those savings to introduce tax incentives, and ii) through depreciation of the euro that could impact favorably to the export sector in the eurozone.
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