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ECB rings in new year with QE fireworks

The European Central Bank began 2015 with a bang, unveiling plans Thursday for a massive trillion-euro bond purchase programme to ward off deflation and end stagnation in the eurozone economy.

Frankfurt: The European Central Bank began 2015 with a bang, unveiling plans Thursday for a massive trillion-euro bond purchase programme to ward off deflation and end stagnation in the eurozone economy.

After holding key interest rates at their current all-time lows once again at its first policy meeting of the year, the ECB launched a scheme to buy 60 billion euros (USD 69 billion) worth of private and public sector bonds per month between this March and September 2016.

ECB chief Mario Draghi explained the aim was to drive eurozone inflation -- which turned negative in December -- back up to the ECB`s target of around 2.0 percent.

The programme, which is known as quantitative easing or QE, will continue "until we see a sustained adjustment in the path of inflation," Draghi told a news conference.

While QE has been used by other central banks around the world to jump-start their economies, the ECB has so far steered clear amid concerns it would overstep its mandate.

Critics, including the German central bank or Bundesbank, complain that QE is a licence to print money to get governments out of debt.

But Draghi said that the ECB`s 25-member governing council was "unanimous" on the principle that such a plan was a valid monetary policy tool.

And a "large majority" was in favour of taking such measures "now", he added.

Opponents to QE had also expressed concern that European taxpayers would have to foot the bill should any one country default on its debt.

But the plan had been designed so that only 20 percent of those risks would be shared, with the other 80 percent to be shouldered by the national central banks of the countries concerned, Draghi said.

Economists are also divided as to whether quantitative easing can really work in a single currency bloc made up of 19 economies in very different states of health. Europe`s paymaster Germany, in particular, is concerned that the measure will take the pressure off governments to reform their economies and get their finances into shape.

At the World Economic Forum in Davos, German Chancellor Angela Merkel insisted that "we should not become diverted from the fact that we as politicians need to put a framework for recovery in place.

"Europe continues to be confronted by great challenges. We have often talked about the debt crisis ... we have this somewhat under control but we are not out of the woods yet," she said.

Draghi took a similar line.

"Monetary policy can create a basis for growth but it`s up to governments and the EU Commission to make sure growth actually takes place," he said.

A group of German eurosceptics who already took the ECB to court over previous measures they believed contravened Germany`s constitution said they would examine taking similar action against QE.

Nevertheless, financial markets cheered the ECB`s plans.

European stocks rallied on the announcement and US shares were higher in mid-day trades in New York, while the euro sank against the dollar.

"Once again, Draghi delivered," said Berenberg Bank economist Christian Schulz.

Sixty billion euros per month were equivalent to 0.6 percent of eurozone GDP "and thus smaller than the Japanese QE, but larger than any of the US Federal Reserve`s easing programmes since 2008," Schulz said. And that could have a positive impact on confidence and inflation expectations, he added.

Deutsche Bank economist Mark Wall said he saw no reason for markets to be disappointed by the programme.

But Commerzbank economist Joerg Kraemer was more cautious about the measure`s effectiveness.

"Private households and companies in many eurozone countries are still too much in debt, so they will hardly spend more on account of low interest rates," he said, arguing that the only impact of eurozone QE would be to weaken the euro.

As a result, "the move will hardly have much impact on the painfully slow recovery or on low inflation," he concluded.

Capital Economics economist Jonathan Loynes agreed, saying "QE won`t miraculously cure all of the currency union`s problems."

And IHS Global Insight analyst Howard Archer said QE "is not a silver bullet for the eurozone`s many problems."

While it may add to stimulus already coming from very low oil prices and the markedly weaker euro, "these stimuli can only go so far in helping the eurozone to grow and what remains crucial to long-term growth prospects will be reform aimed at boosting countries` competitiveness and productivity," Archer concluded.