MercoPress. South Atlantic News Agency

ECB follows US, UK, Japan and announces quantitative easing

The European Central Bank is to embark on its own quantitative easing program in response to the sharpest economic slowdown in Europe since the Second World War, it was announced Thursday. The news follows similar measures in the UK, US and Japan over the past few months.

The ECB move is “unprecedented in nature, scope and timing” ECB president Jean-Claude Trichet said Thursday afternoon at the conclusion of the European central bank’s monthly meeting.

On Monday the European Commission said the European economy would shrink by 4% this year - the biggest annual contraction since the end of the Second World War.

The decision has been taken to “promote the ongoing decline in money market term rates, to encourage banks to maintain and expand their lending to clients, to help to improve market liquidity in important segments of the private debt security market, and to ease funding conditions for banks and enterprises”, added Trichet. The full details of the new ECB scheme would be announced in early June.

The ECB also cut Eurozone interest rates to 1% - their lowest ever level, and down from 4.25% in October 2008.

There had been considerable speculation that the ECB might announce radical moves, though some commentators had only expected more conservative monetary measures, such as extending the maturity at which the central bank lends.

“In addition to the reductions in interest rates, the Governing Council [of the ECB] decided today to proceed with its enhanced credit support approach”, said Trichet in a press conference adding that “in continuity and consistency with the operations we have undertaken since October 2008, and in recognition of the central role played by the banking system in financing the Euro area economy, we will conduct liquidity-providing longer-term refinancing operations with a maturity of 12 months”.

“The Governing Council has decided in principle that the Euro system will purchase Euro-denominated covered bonds issued in the Euro area. The detailed modalities will be announced after the Governing Council meeting of 4 June 2009”.

“Furthermore, the Governing Council has decided that the European Investment Bank will become an eligible counterparty in the Euro system’s monetary policy operations with effect from 8 July 2009 and under the same conditions as any other counterparty”.

Trichet said the ECB was working on the basis that prices would continue to be dampened by the fall in commodity prices and the marked weakening of economic activity in the Euro area and globally.