The ECB has decided that Eurozone’s economic fundementals are strong enough for it to first halve and then end its massive bond-buying stimulus programme that was due to run out in September.
ECB president Mario Draghi faced a tricky vote on monetary policy at a meeting in Riga, Latvia today.
The key topic up for discussion was the ECB’s massive bond-buying stimulus programme and European policymakers were forced to decide whether to call time on the scheme and prove to the world that the eurozone had recovered from the 2009 debt crisis, or extend the scheme into 2019.
The ECB said: “At today’s meeting, which was held in Riga, the Governing Council of the ECB undertook a careful review of the progress towards a sustained adjustment in the path of inflation, also taking into account the latest Eurosystem staff macroeconomic projections, measures of price and wage pressures, and uncertainties surrounding the inflation outlook.
“Based on this review the Governing Council made the following decisions:
“As regards non-standard monetary policy measures, the Governing Council will continue to make net purchases under the asset purchase programme (APP) at the current monthly pace of €30 billion until the end of September 2018.
“The Governing Council anticipates that, after September 2018, subject to incoming data confirming the Governing Council’s medium-term inflation outlook, the monthly pace of the net asset purchases will be reduced to €15 billion until the end of December 2018 and that net purchases will then end.”
The ECB currently buys €30bn in government bonds a month in what has become known as a quick fix to boost the flow of money and short-term growth.
In total the ECB has bought more than €2.4 trillion bonds under its quantitative easing (QE) programme, in an attempt to fight off another economic downturn.
Many feel that the money printing project has run its course and the time is right for a newly confident eurozone to step out from the shadow of QE.
However, with economic growth is once again slowing in the eurozone – particularly in Germany – and with Trump inspired geopolitical tensions mounting, the ECB was reluctant to move away from a tried-and-tested, albeit short-term winning formula.
Events in Italy had also threatened to derail the ECB’s desire to end QE after electing the eurozone’s first euro-sceptic government that had previoulsy made threats to leave the euro.
Despite the news on QE, the Euro has sunk 0.53 against the pound after the ECB announced that interest rates probably on hold until 2019.
The headline cost of borrowing in the eurozone will probably remain at zero for many months to come and banks will continue to be charged a negative interest rate of -0.4%, in an attempt to get institutions lending.
The ECB said: “The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path.”
Aberdeen Standard Investments Senior Investment Manager Patrick O’Donnell told Express.co.uk:
“This is a pretty cautious message from the ECB. By saying the QE programme will end this year but not signalling a rate hike until at least next summer Mr Draghi is giving with one hand and taking away with the other.
“At this stage he’s committed himself to waiting until at least the second half of next year to raise rates. This will comfort markets but we must remember that at this stage it is just a guide and not a guarantee.”
He adds: “Today is mainly going to be symbolic, marking the end of an era in Europe.
“It tees up the end of easy money and sets the stage for rates to rise next year. So it’s another step on the way to removing the extraordinary global monetary stimulus over the last decade.
“Italy’s crisis looms large over the European economy and it is not out of the woods yet by any means. The deep structural issues in countries like Italy lurk barely below the surface.
Unsurprisingly, after months of poor economic data the ECB has cut its growth forecast, from 2.4 percent to 2.1 percent.
Alluding to a potential trade war, President Draghi said that global risks have increased alongside a rise in protectionist measures.
More to follow…