By now, you’ve probably heard that the European Central Bank (ECB) initiated its so-called ‘Quantitative Easing’ programme last week. Although you may not be too familiar with the details of QE, its effects will be felt by everyone – from tourists and savers to exporters and importers. In particular, the recent dramatic fall in the value of the euro against the US dollar and pound sterling is a direct result of QE.
To put the ECB’s actions in context, on 22 January it announced a massive expansion of its asset purchase programme, known as the Public Sector Purchase Programme (PSPP). Under the PSPP, the Eurosystem will buy sovereign bonds from euro-area governments (including Irish bonds, of course) and securities from European institutions and national agencies. The purchases started on 9 March and are due to last at least until September 2016. The ECB’s Governing Council indicated that QE is open-ended and will continue until the ECB sees â€œa sustained adjustment in the path of inflation which is consistent with the aim of achieving inflation rates below, but close to, 2 per cent over the medium termâ€.
The effects of QE are varied. It has already had a beneficial impact on European public finances through the very significant fall in yields throughout the euro area since mid-2014 in anticipation of QE. Last week, the National Treasury Management Agency (NTMA) sold €1 billion of a 30-year Irish government bond at a record low yield of 1.31 per cent. Thanks to low yields, the NTMA has refinanced more than €18 billion of the €22.5 billion borrowed from the IMF as part of the bailout and the refinancing will deliver savings of over €1.5 billion over the lifetime of the loans. In terms of ongoing borrowing, as the ten-year yield on Irish government debt is under 0.80 per cent, it will make interest repayment more affordable.
However, the bigger impact of QE will be via the exchange rate. Two years ago, a euro was worth $1.39. As of Monday, it was under $1.05. Indeed, many foreign exchange traders are forecasting parity within months and the euro falling below $1 by 2016. The last time the dollar was worth more than the euro was December 2002. How far the euro keeps falling depends on how much the US Federal Reserve raises interest rates and how long the ECB buys bonds. Those are uncertain factors. Nevertheless, Deutsche Bank’s forecasts of a euro-dollar rate of $0.90 by the end of 2016 and $0.85 by the end of 2017 are pretty much consensus estimates.
The impact of this trend cannot be understated. A family ticket to Walt Disney World in Florida for $1,000 cost around €720 in 2013, but now would set you back over €950 and would cost almost €1,180 if the $0.85 rate comes to pass. Conversely, for American tourists coming to Galway, a €20 main course would have fallen from $28 in 2013 to $21 today. So, the most noticeable short-term trend you may observe may be a significant increase in US tourists arriving here this season. If this past St Patrick’s weekend is anything to go by, that trend has already begun.