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Why ECB can't quit fast it's QE program what will be consequences?
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Loading...Quantitative Easing (QE) is conducted by a number of developed economies. By its nature, QE means buying out government and corporate bonds on the part of the central bank in order to stimulate inflation. How does this work? The printing of money and the purchase of corporate or government debt actually pour capital into the institution and increase the turnover of the currency in circulation. The idea is that an increased supply of currency on the market will lower demand, which in turn will lower the value of the currency. A large volume of a commodity = a decrease in the value of the commodity. Inflation is reflected precisely in this - a decline in the purchasing power of the currency.
Another approach by the bank to raise inflation is to lower the credit interest rate. The decrease in the interest rate on central bank lending leads to a decrease in the interest rate and to commercial banks, and stimulates borrowing by consumers. The idea is that after the loan is taken, the consumer will "pour" the money into the economy and stimulate demand, increase the turnover of money in the market and stimulate inflation.
Every developed economy has determined that inflation rates of around 2-3% are positive for the economy and stimulate growth. The fall in inflation below these levels results in an increase in the value of the currency, which seriously hurts export-oriented companies.
What will happen if Mario Draghi suddenly quits QE or sharply raises the interest rate. The forex market is known to be trading expectations, not facts. Currently all expect the ECB to continue QE by the end of 2018, and market makers priced this in the value of the euro. Any change in QE or interest rate will most likely lead to a significant appreciation or decrease of the common currency. The central bank strives to smoothly and gradually make such changes because sudden changes in monetary policies will lead to market uncertainty and too rapid devaluation or currency appreciation.
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