The European Central Bank took the watershed decision to halt its €2.6tn ($3tn) bond-buying programme, capping massive monetary support even though the eurozone economy looks vulnerable again.
Policymakers led by president Mario Draghi confirmed that they’ll stop net purchases this month, ending almost four years of quantitative easing. Signalling it’s still a way from tightening policy, the Governing Council changed its guidance to say maturing debt will be reinvested “for an extended period of time past the date when it starts raising the key ECB interest rates.” Rates will remain at record lows “at least through the summer” of 2019.
While the decision will likely be welcomed by nations such as Germany that have long complained about ultra-loose policy, it comes at a testing time. Updated economic projections to be released by Draghi will show downgrades to the inflation and growth outlooks, according to people familiar with the matter.
The president will explain his thinking to reporters at 2:30pm in Frankfurt, when he’ll face questions on the slowing momentum as well as a range of risks including skittish global markets, US trade protectionism, Brexit and Italy’s fiscal tensions.
The euro fluctuated on the news, and was little changed at $1.1382 at 1:49pm Frankfurt time.
QE started in the euro area in March 2015 in the hope that it would stave off the threat of deflation by pushing down market interest rates and encouraging risk-taking. It was launched months after the Federal Reserve stopped its own program and only after battles within the Governing Council, which had already cut interest rates below zero, with German policy makers leading the opposition.
“Draghi’s job today is to persuade market participants that the outlook hasn’t deteriorated sufficiently to abandon plans for rate hikes. Already, market pricing has shifted,” said Jamie Murray, David Powell and Maeva Cousin of Bloomberg Economics.
Initially it was supposed to run for less than two years, yet multiple extensions along with other monetary measures such as long-term bank loans bloated the ECB’s balance sheet to €4.7tn. That’s equivalent to more than 40% of economic output, compared with 20% at the Fed.
Whether it worked is debatable. According to the ECB’s latest estimate, the purchases will have added a cumulative 1.9 percentage points each to growth and inflation from 2016 to 2020. Euro-area growth also outpaced the US in 2016 and 2017.
Yet some economists including CME Group’s Erik Norland say the ultimate benefit for growth was a lot closer to zero, as there was no obvious impact when the pace of bond-buying started to slow. Critics in Germany blame QE for saving governments such as Italy’s from taking needed steps to reform their economies.
The announcement, confirming a plan first agreed in June, came after a spate of central-bank decisions in Europe. The Swiss and Norwegian central banks left policy unchanged, though the Swiss National Bank cut its inflation outlook.
Turkey and Ukraine also kept rates on hold. The Fed is set to hike rates next week for the fourth time this year.
Recent euro-area economic data highlight how the summer slowdown — including contractions in Germany and Italy — is proving tough to overcome. Purchasing managers are even less optimistic about growth than they were before the start of QE.
At the same time, Draghi can point to wage gains in the euro area that are at the strongest in a decade. That’ll help the ECB meet its goal of restoring inflation to just under 2% over the medium term, ultimately without extraordinary monetary support.
The next major step toward normalisation should be an interest-rate increase. The last rate hike was in 2011, a misstep by Draghi’s predecessor Jean-Claude Trichet just before the euro area tipped in a double-dip recession.
Economists surveyed by Bloomberg last week predicted borrowing costs will rise in September 2019, but investors are more cautious. They’ve pushed back bets on when the next hike will come, pricing an increase for the first quarter of 2020.
ECB president Mario Draghi reacts during a rates decision news conference in Frankfurt yesterday. Policymakers led by Draghi confirmed that they’ll stop net purchases this month, ending almost four years of quantitative easing.
