Third quantitative easing programme announced

The Federal Constitutional Court in Germany dismissed motions that sought to block the country’s participation in the European Stability Mechanism, the euro area’s permanent bailout fund. This provided a further boost to financial markets last week.

However, the court said that German liability must not exceed €190 billion. This decision comes on the heels of the announcement the previous week by the European Central Bank to purchase unlimited amounts of peripheral short-maturity government bonds.

In the meantime, German factory orders increased in July. This increase was spurred by a gain in domestic demand for investment goods which offset a decline in sales to other euro-area countries.

According to the Economy Ministry, seasonally-adjusted and inflation-adjusted factory orders went up by 0.5 per cent from June, when they fell a revised 1.6 per cent. A Bloomberg News survey of economists had forecasted a 0.3 per cent increase.

Compared to July of last year, adjusted factory orders dropped by 4.5 per cent. Domestic spending is shielding the German economy, Europe’s largest, from the sovereign debt crisis that has tipped at least five euro-area countries into recession.

The US Federal Open Market Committee, in an effort to ease unemployment and sustain economic growth, said it will expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt per month. For the first time, the Fed mentioned the three pillars, unemployment, inflation and interest rates, with Fed chairman Ben Bernanke vowing to fight on until the US recovers.

Moreover, Fed announced it will hold the extremely low federal funds rate level of 0 per cent to 0.25 per cent not only through late 2014, but most likely “at least through mid-2015”. Stock markets cheered on the news, sending benchmark indices to their highest levels since 2007.

This article was compiled by Bank of Valletta for general information purposes only.