5 reasons why the ECB's quantitative easing or QE matters to you

An inflated Euro sign of the news channel CNBC is placed in front of the European Central Bank (ECB) in Frankfurt, Germany on Jan 22, 2015. -- PHOTO: EPA
An inflated Euro sign of the news channel CNBC is placed in front of the European Central Bank (ECB) in Frankfurt, Germany on Jan 22, 2015. -- PHOTO: EPA

The European Central Bank finally unveiled its much anticipated quantitative easing (QE) programme on Thursday (Jan 22), pledging to spend up to €60 billion monthly to buy government bonds from March till September 2016, in a bid to cut interest rates, stoke demand and stabilize the region's uneven recovery.

Here's a quick look at why this QE matters to you:

1. It may lift demand for Singapore's exports

If it works. The European Union is Singapore's third largest trading partner for merchandise and the largest trading partner in services. Should demand in Europe recover as hoped, Singapore's exports of goods and services will likely benefit.

2. The shock-and-awe tactic is lifting the stock market

Investors are cheering the bigger-than-expected size of the ECB stimulus - amounting to 1 trillion euros (S$1.7 trillion) over 18 months - and the ECB chief Mario Draghi's pledge to continue the programme beyond that if needed. Asian markets surged in trading on Friday (Jan 23) following a rally overnight on Wall Street, with European markets to follow. It's still too early though to say how long this boost in confidence will last.

3. It's keeping the euro down

The euro sank to a more than 11-year low against the US dollar after the ECB announcement on the prospect of more cheap euros flooding the eurzone. Against the Singapore dollar the euro also on a slide from the 1.63 level in mid December last year to hit around 1.52 this morning - the lowest since November 2000. Good news for shoppers and tourists, as the region's consumer prices may remain low for a while yet.

4. It underlines how big a global threat deflation could be

Tumbling oil prices is stoking fears of deflation worldwide. The ECB resorted to this massive QE mainly to fight this growing threat after a string of weak inflation figures that culminated in a fall in consumer prices in December for the first time in five years. Singapore is also experiencing negative consumer prices for the first time in five years. The Swiss central bank, spooked by the fear of deflation, unpegged its franc last week. Chinese manufacturers are cutting prices as demand stays anaemic.

5. QE may hold back needed structural reforms in the eurozone

German Chancellor Angela Merkel was at pains on Thursday to warn that QE not derail painful structural reforms in Europe. The worry is that QE may become a bailout in disguise for countries such Italy and Greece where transformation in the labour market is desperately needed, thereby delaying reforms and worsening economic issues in the region.

whwong@sph.com.sg

ann@sph.com.sg