Business Irish

Tuesday 18 December 2018

QE will give a boost to exporters, says Noonan

Minister for Finance Michael Noonan
Minister for Finance Michael Noonan

Colm Kelpie

Quantitative easing would lead to a depreciation of the euro which would be a boon for Irish exporters, Finance Minister Michael Noonan has said.

Mr Noonan has said the European Central Bank (ECB) needs to find ways of doing QE - buying sovereign bonds - saying monetary policy in Europe was weak. But the European central bank has been reluctant to embark on a sovereign bond-buying programme amid opposition, chiefly from Germany.

The ECB is watching carefully how the plunge in oil prices will affect inflation in the Eurozone, now at 0.3pc and far below its target of just below 2pc, and is weighing up whether to do more to keep the region from slipping into outright deflation.

Having largely exhausted its options with the key interest rate at record lows of 0.05pc, broad-based purchases of sovereign bonds are seen as the ECB's last resort to revive the stagnating economy.

Bundesbank head Jens Weidmann is one of the most outspoken opponents of the move on the Governing Council. He's concerned that the central bank could lose sight of its mandate to keep prices stable.

Asked about the benefits of QE for the Irish economy, Mr Noonan said a programme of quantitative easing would be expected to lower borrowing costs and increase the supply of credit to the real economy.

"In this way, real economic activity in the euro area would be expected to increase and inflation in the euro area as a whole would move back towards target," the minister said, in response to a parliamentary question from Fianna Fail's Michael McGrath.

"The Irish economy would therefore benefit from both the reduction in borrowing costs and the improvement in activity in key export markets.

"In addition, QE would probably be associated with a depreciation of the euro, which would benefit exports to outside the euro area." Inflation in Ireland is mirroring the trend in the Eurozone as a whole, with annual inflation here running at just 0.1pc, with consumer prices actually falling last month, for the second month in a row, by 0.3pc.

The ECB slashed its forecasts earlier this month for growth and inflation in the bloc over the next two years, saying the outlook had deteriorated since its last staff forecasts were published in September.

It estimated 2014 inflation at 0.5pc, rising slightly to 0.7pc next year and 1.3pc in 2016, with economic growth projections cut to 0.8pc this year and just 1pc next year.

Executive board member Benoit Coeure has said that there is a broad consensus on the governing council in favour of more action to revive the economy.

But he signalled QE may not be the way to go. In an interview earlier this week, he said he found what he called the "fascination" with QE "a bit naive".

The size of the ECB's balance sheet is important as a signal of its determination to act, he said, but "nothing guarantees that what worked in the United States or Japan can be done identically here".

While the ECB has stepped up preparations for possible further stimulus, Mr Weidmann said this week that he also wasn't convinced of a potential QE move. "Against the background of the rather moderate and uncertain impact as well as the risks and side effects and the not clearly given necessity at the current point in time, I am currently sceptical of a broad-based QE programme," said Mr Weidmann.

The ECB has already set itself a goal of expanding its balance sheet - by buying assets from banks and others in return for cash it hopes will be pushed into the economy - by up to €800bn or even €1 trillion.

The ECB has been criticised for failing to deal with the low inflation issue. Former IMF Ireland mission chief Ashoka Mody said the central bank has been "woefully behind the curve".

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