ECB to phase out €2.4tn bond-buying programme

The European Central Bank is to wind up its €2.4 trillion bond-buying programme by the end of the year, calling time on an extraordinary monetary programme that many economists credit with reviving the euro-zone economy but which became increasingly divisive within the bank itself.

The bank is to halve the size of monthly asset purchases to €15 billion after September and to phase them out entirely after the end of the year. It left interest rates at record lows.

Thursday’s ECB decision, at a meeting in Riga, Latvia, comes after the euro zone achieved 2.3 per cent growth in 2017, although more recent indicators suggest the pace of expansion has flagged this year.

Many analysts thought the bank would only set out its plans for exiting quantitative easing in late July – even though there was widespread expectation that the programme would finish by the end of 2018.

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The euro fell by 0.6 per cent against the dollar to $1.1725 on the day – failing to hold highs that initially lifted it by as much as 0.5 per cent – as cautious elements in the ECB’s approach influenced market reaction.

The ECB said it had made its decision to end bond purchases in December after carrying out a review that took into account “macroeconomic projections, measures of price and wage pressures and uncertainties surrounding the inflation outlook”.

The bank’s move brings it closer into line with the US Federal Reserve and the Bank of England, which have not only ended quantitative easing but also started raising rates.

Stronger growth

ECB officials from Germany and other northern European countries argue that since growth is now stronger, it is vital to begin to normalise the bank’s approach so that it has more ammunition to deal with a future downturn.

They also contend that achieving sustainable growth depends on economic reform in more troubled euro-zone economies such as Italy and Greece.

However, Thursday’s decision does not actually tighten monetary policy. Instead it makes clear that additional loosening via the quantitative easing programme will continue until the end of the year.

Only if and when the ECB stops reinvesting the proceeds of maturing bonds will it begin to rein in the balance sheet it built up throughout quantitative easing, a move likely to push up corporate borrowing costs.

Policymakers in the single-currency area remain cautious about when the quantitative easing stimulus should be withdrawn and on Thursday the bank confirmed its commitment to reinvest the bonds’ proceeds for “an extended period of time” after quantitative easing ends “and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation”.

The ECB also not only kept interest rates at record lows but added that it expected rates to “remain at their present levels at least through the summer of 2019”.

The benchmark main refinancing rate remains at zero and the deposit rate at minus 0.4 per cent.

ECB president Mario Draghi is to meet the press on Thursday afternoon to explain why the bank took such a decision when risks to the economic outlook including high oil prices, political turmoil and the possibility of a trade war all threaten to weigh on growth.

At the same time, wages are rising at a faster pace across the euro zone, suggesting the bank is coming closer to hitting its inflation goal of just under 2 per cent.

Mr Draghi will present a new round of forecasts at the press conference which are likely to show upgrades in inflation due to higher oil prices and steeper wage growth.

The previous forecasts, from March, showed inflation hitting 1.4 per cent this year and next, before rising to 1.7 per cent in 2020. Growth was set to hit 2.4 per cent this year, before falling to 1.9 per cent in 2019 and 1.7 per cent in 2020. – Copyright The Financial Times Limited 2018