The Pound Sterling to Euro (GBP/EUR) exchange rate surged to reach a new 7-Year high on Thursday after the European Central Bank (ECB) announced a bigger than forecast quantitative easing programme.
The GBP/EUR exchange rate is trading in the region of 1.319
ECB President Mario Draghi surprised economists by launching a government bond-buying programme, which will pump €60 billion per month of new money into the faltering Eurozone economy.
Draghi announced that the ECB would buy government bonds from March until the end of September 2016, by that time €1 trillion will have been introduced into the European economy.
The move is expected to draw the ire of the German Bundesbank, which has concerns that the introduction of the programme will allow loose spending Eurozone members to slacken on introducing promised economic reforms.
‘We welcome the measures announced today that will strongly reinforce the ECB’s accommodative stance. The planned expansion of the ECB’s balance sheet will help lower borrowing cost across the euro area, raise inflation expectations and reduce the risk of a protracted period of low inflation. These measures will also strongly increase the prospects of the ECB achieving its price stability mandate,’ said International Monetary Fund chief Christine Lagarde.
Many economists were impressed with the bigger than expected QE announcement but others were not so positive.
‘The ECB has to act to prevent the Eurozone from falling into an even more dangerous situation, but the ECB’s proposed QE programme may be too little too late, given the size of the challenge. The impact of Eurozone QE is heavily dependent on the money reaching Eurozone businesses rather than flowing to, and through, bank balance sheets via government bonds. QE must improve conditions in the financial system and increase the availability of credit to private sector businesses in order to work,’ said John Longworth the director general from the British Chambers of Commerce.
Following Draghi’s comments, the Euro tanked against all of its most traded peers. The currency is now forecast to continue to decline over the coming sessions as the market takes stock of the announcement.
‘Although a fair amount of Euro weakness was priced in prior to today’s announcement I feel that further pressure will be put on the single currency with flow moving towards the US Dollar and Pound. The ECB have met expectations and possibly exceeded, but time will tell,’ said Harry Adams, from Argentex LLP.
The ECB also left interest rates unchanged at 0.05%.
