QE for Europe and China?

Yuan, euro and US dollar notes Image copyright AFP

Even though the US Federal Reserve looks likely to end its cash injections after five years, other major central banks in Europe and China are contemplating quantitative easing (QE).

What's brought this about? In short, the spectre of deflation and a slowing economy.

When interest rates are nearly zero or very low, cutting rates may not provide enough stimulus, so central banks have to look at other tools.

Inflation in the eurozone is currently at just 0.7%, considerably below the European Central Bank's (ECB) target of just below 2%, while in Germany, inflation is running at only 0.6%.

For China, consumer prices are rising by 1.8%, which is half of its target. Worse, the latest figures for producer prices showed them falling by 2%: the producer price index (PPI) has been deflationary for 26 consecutive months.

In other words, there are signs of deflation that are worrying both the ECB and the People's Bank of China (PBOC) amidst weak growth.

Both central banks are contemplating buying assets, such as government bonds, which is what the Fed and Bank of England did during the global financial crisis.

The ECB is widely expected to act on Thursday.

The PBOC has been taking measures to ease credit for small firms and some mortgages. But for these central banks to undertake QE would require exhausting other tools in their arsenal.

Mandate debate

I have written before about the challenge for the ECB, no less because it would need to decide which countries' bonds to buy.

For China, that wouldn't be the issue.

It would, though, face the same ban on monetary financing of government debt that has caused the ECB to refrain, even during the euro crisis. China's Central Banking Law says that the PBOC may not directly purchase or underwrite government bonds or other debt.

Image copyright AFP
Image caption The ECB has already made two rounds of unlimited cheap loans to banks

So for both central banks, the decision to do QE would require a debate over their mandates.

Both have already done quite a lot of cash injections, largely via banks.

For the ECB, there have been two rounds of unlimited cheap loans to banks, known as LTRO.

For the PBOC, it has cut the reserve requirements - the amount of cash that rural banks need to hold - to inject more cash into select sectors.

It has also provided cash or liquidity to the China Development Bank, which in turn offers financing to the economy.

The stabilising of the renminbi also means that there is less money printing to peg the currency, though that is largely sterilised - or offset - by the state-owned banks having to deposit the equivalent amount into the central bank.

But as deflation persists, and with debt in the banking sector also being a concern for China, these actions don't seem to be enough.

There are still tools available, such as cutting reserve requirements (RRR) for Chinese banks.

My colleague Robert Peston has written about how the ECB could charge banks to deposit money with it - a negative deposit rate that was tried by Denmark's central bank in 2012.

So QE could return, even as the US policy ends. In any case, interest rates won't be the only thing to watch in terms of what central banks do in the future.


Today's figures show that inflation in the eurozone is only 0.5%. That proof of stubbornly low inflation will put yet more pressure on the ECB to come up with something on Thursday that really makes a difference.

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