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Central bankers around the eurozone began buying sovereign bonds on Monday as part of the European Central Bank’s €1.1tn landmark quantitative easing programme.
But will policy makers’ purchases of government debt prove enough to revive the region’s economy?
It is impossible to disentangle the effects of QE from other economic and political factors, such as cheaper oil prices and risks emanating from Athens and events at the EU’s eastern borders. These five economic metrics should, however, give some idea of whether QE is helping to steer the eurozone towards a meaningful recovery.
Inflation and inflation expectations
The ECB does not have a mandate to support job creation or growth. Its only target is to keep inflation below, but close to, 2 per cent — a goal it has missed for the past two years.
That makes raising inflation “the ultimate yardstick” for QE’s success, according to Nick Matthews, economist at Nomura.
The ECB has its work cut out. Prices in the region are now falling for the first time in five years, although much of the slump reflects the fall in oil costs.
The central bank expects no inflation this year. But it is confident QE can help raise inflation to 1.8 per cent by 2017. However, those calculations depend in part on future rises in crude prices.
Inflation expectations matter too.
Mario Draghi, ECB president, built his case for QE around falls in an arcane measure of what markets think will happen to prices five years from now. Expect ECB watchers’ attention to remain fixed on the so-called five-year on five-year swap rate — if it rises towards 2 per cent, then that will be an important signal of investors’ faith in QE as a means to return inflation back to target.
The start of QE comes just days after a better than expected round of US jobs numbers fuelled speculation the US Federal Reserve will raise rates around the middle of this year.
The diverging paths of the world’s two most important central banks has sent the euro to 11-year lows against the dollar. The ECB will hope that the euro continues to weaken as it presses ahead with bond-buying.
As well as the euro-dollar exchange rate, keep a close eye on trade data too.
If the single currency remains weak, then the region’s exports will look relatively cheap to buyers outside of the region. Businesses that rely on demand within the region should see spending by eurozone consumers rise as their prices become more competitive against those of importers.
Mr Draghi was bullish last week that, after years of economic crisis and near-stagnation, the eurozone economy has finally turned a corner.
The ECB president took a lot of the credit for this, saying that QE was already having numerous positive effects on the region’s economy despite the ECB having yet to buy a single government bond.
But QE is no cure all. And the eurozone’s economic success will depend on much more than asset purchases by the ECB — confidence cannot completely return when unemployment remains disturbingly high in much of the region and political risks are rife.
Still, the ECB thinks the region’s recovery will begin to broaden and strengthen. It recently upgraded its growth forecasts to 1.5 per cent this year, 1.9 per cent in 2016, and 2.1 per cent in 2017.
Figures for eurozone growth in the first quarter are out from Eurostat, the European Commission’s statistics bureau, on May 13.
A dearth of lending is among the most important symptoms of the eurozone’s economic troubles. QE is supposed to help by forcing banks to sell their holdings of government debt and take on more risk, either by buying other assets or lending more.
There are already signs that credit conditions are easing for the businesses and households in the region that have struggled to borrow at cheap rates.
Important metrics to watch are the statistics that the ECB produces on money and credit indicators. A quarterly bank lending survey, as well as information on borrowing rates around the region, are also worth keeping a close eye on.
Lending is unlikely to shoot up straight away, however. Confidence remains too fragile. And banks may not want to sell much of their government bonds because of rules on capital and liquidity requirements.
A big question for financial markets is the extent to which yields on eurozone sovereign bonds, which move in the opposite direction to prices, turn negative.
According to JPMorgan, more than €1.6tn of the safer eurozone government bonds, such as German debt, is trading at negative yields — meaning investors are willing to receive less cash by holding eurozone bonds to maturity than what they have paid for them. According to the US bank, that number has risen by €350bn since QE was announced.
The ECB last week set a ceiling on what it was willing to pay for bonds — debt on offer at yields of below its deposit rate of minus 0.2 per cent will not be bought.