With deflation now a real prospect the ECB has agreed to inject some 1.1 trillion euros into the eurozone economies through the purchase of government and corporate bonds. The quantitative easing (QE) programme was widely expected to involve monthly bond purchases of 50 billion euros up until the end of December 2016. However, the decision was reached to undertake 60 billion euros worth of asset purchases a month, and reduce the length of the progamme, which will run until September 2016, rather December.
The formal announcement was made on Thursday 22nd January. The ECB stated that it will add the purchase of sovereign bonds to its existing private sector asset purchase programme. This, they hope, will address the risks of too prolonged a period of low inflation, and avert eurozone deflation. With interest rates historically low, the expectation is that QE will ease monetary and financial conditions, enabling households and firms to borrow, to spend or invest - two key components of aggregate demand.
However, the success or not of the QE programme remains to be seen. Former member of the Bank of England's MPC, Andrew Sentance cast doubts when he wrote in The Times (January 20th, 2015) that the quantity of asset purchases would only represent an injection of a miserly 5% of the eurozone's combined national output - much lower than the Bank of England's QE programme, which equalled 21% of UK output, and Japan's, at 26%.
Widespread doubts exist about whether a monetary stimulus is, at this time, an effective way to increase confidence and stimulate eurozone demand, and indeed to avoid deflation. Doubters point out that QE will not be effective in tackling the underlying weakness of global demand, nor will it have a significant effect on household spending in the eurozone. Having said that, not engaging in QE, and then suffering deflation would put policy makers and the ECB in a very difficult position. Hence, QE is almost inevitable.