The printing press: why the new policy of the ECB provoked the weakening of the euro

On Friday, September 13, the Russian currency strengthens during trading on the Moscow Exchange. The dollar depreciated by 0.9%, to 64.1 rubles, and the euro depreciated by 0.5%, to 71.2 rubles.

The official exchange rate of the Central Bank as of September 14 was 64.47 rubles per dollar and 71.53 rubles per euro.

The appreciation of the national currency started the day before. So, during the auction on September 12, the euro at the moment fell below 71 rubles - for the first time since the beginning of August. Later, the course recovered somewhat, but still remains near a record low over the past month and a half.

Experts associate such dynamics with the results of the meeting of the European Central Bank (ECB). On Thursday, the regulator worsened the forecast for Eurozone GDP growth in 2019 - from 1.2% to 1.1%, and in 2020 - from 1.4% to 1.2%. To support the regional economy, ECB President Mario Draghi announced the launch of a quantitative easing program.

The ECB intends to turn on the "printing press" and buy government bonds of the eurozone countries with the money issued. The actions of the central bank lead to an increase in the money supply in the region, allow to accelerate inflation and increase GDP growth rates. At the same time, quantitative easing traditionally provokes a weakening euro in the long run.

The ECB has previously pursued a policy of quantitative easing in the eurozone from 2015 to 2018. Then the regulator acquired securities worth € 2.6 trillion. The new program will begin on November 1, 2019 and does not yet have an approved end date. As expected, the ECB will purchase bonds worth € 20 billion per month.

“The ECB’s decision is connected with inflation in the eurozone, which has been at the lowest level since the end of 2016 - 1%, and the economic growth rate has reached its lowest level since 2015. Therefore, given the actions of the regulator, the euro will continue to weaken against the ruble and the dollar in the global market, ”said Denis Ikonnikov, portfolio manager of QBF, in an interview with RT.

According to the expert, low inflation indicates a low level of consumer demand in the region. The persistence of this situation over a long period of time leads to stagnation in the economy of the region.

In other words, the European Central Bank is trying to disperse the economy through additional cash injections. At the same time, the planned ECB program risks turning into a bloating financial bubble in the eurozone market. It is highly likely that speculative demand for European assets will increase, securities will begin to rise in price, but the economy will continue to stagnate. This was told in an interview with RT by the director general of IK Oriole Capital Andrei Khokhrin.

“In theory, the ECB should strengthen investment and consumer confidence and increase the amount of free money in the financial system. This is necessary for lending to a business. However, so far and for almost ten years, such steps have led to undesirable long-term consequences. Financial markets were inflated, credit leverage was growing (the ratio of borrowed funds to equity. - RT ), but there was no significant economic effect, ”Khokhrin explained.

According to the expert, the high debt level of the Eurozone countries and the possibility of inflating the financial bubble worries world investors. Such sentiments of market players also negatively affect the European currency.

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In addition, in their forecast, market participants counted on more decisive action by the ECB. It was expected that the regulator would begin a policy of quantitative easing in September and begin to purchase bonds worth € 30-50 billion. This was said in an interview with RT by the analyst of the operations department on the Russian stock market IC Freedom Finance Alexander Osin.

According to him, as a result of lower volumes of purchases and a delay in starting the program until November, the eurozone economy will only feel the effect in 2021. At the same time, the impact on inflation will be lower than expected.

As Denis Ikonnikov explained in an interview with RT, an additional incentive for the eurozone economy could be a reduction in the tax burden in the region. According to the analyst, the ECB can take such a measure and thereby accelerate inflation. At the same time, the European currency will continue to weaken.

According to the forecast of Denis Ikonnikov, before the end of the year, the euro may drop to 70 rubles. At the same time, Alexander Osin expects a value in the range from 67.1 to 72.35 rubles.