Whatās Going On Here?The European Central Bank (ECB) celebrated the fifth anniversary of its āquantitative easingā (QE) program with a meeting on Thursday, and its one wish was that the strategy had actually workedā¦ What Does This Mean?Through QE, a central bank effectively prints money to purchase government bonds from the market, if not other non-government bonds or stocks too. The idea is that extra demand for low-risk bonds (which pushes their prices up and yields down) effectively lowers interest rates on new loans (since existing bond yields can be used as a comparison). That stimulates spending on economy-boosters like car purchases and factory construction, and should push the prices of goods and services up ā a.k.a. inflation.
That's, er, not really panned out in Europe. Inflation has remained stubbornly low, and the blocās economic growth ā having been stymied by the US-China trade war ā has continued to slow. Awkward. Why Should I Care?For markets: No change, all change.
The ECB revealed on Thursday that, as expected, itād leave interest rates unchanged, and wouldnāt increase them until inflation improves. But the ECBās new chair did announce the start of the first wholesale review of the Bankās policies ā including its inflation target ā since 2003 (tweet this). If the central bankās current target of 2% changes, so will investorsā expectations of future eurozone growth and the value of the bloc's currency.
The bigger picture: The next Japan?
Japan has endured years of weak economic growth after its economic crisis in the 1990s, and is still reckoning with inflation troubles of its own. And now, much of Europeās last (or should that be lost?) decade has set the bloc on a similar path. To make matters worse, Europe and Japan share a slowing birth rate, a declining population, and an aging workforce ā leading analysts and investors alike to worry that the eurozone is bound for Japanās fate. | 