Start of ECB QE unlikely to herald strong recovery

The euro-zone's central banks embarked on the €1.1trn QE programme this morning, causing the euro exchange rate and bond yields throughout the region to extend their previous declines.

Recent data have shown credit growth and business sentiment picking up in anticipation of the policy. But exports have been slow to respond to the euro's eight-month decline, perhaps reflecting structural limits on competitiveness and the uncertain global environment. 

Capital Economics notes in a report on Monday:

• We maintain our view that the policy will neither mark the start of a strong recovery nor eradicate the risk of prolonged deflation. 
  
  
• The ECB's announcement that it might buy negative-yielding bonds has helped to drive down even some of the lowest yields. However, we are not convinced that this will cause a sharp reduction in borrowing costs for firms and households in the region's troubled economies. 
  
  
• In all, QE should have a modest positive effect. But the policy is unlikely to kick-start the euro-zone recovery and cannot hope to address the broader political and structural failings that seem set to keep growth slow and deflation risks high for some time to come.