ECB to conclude bond buys as crisis-era policies taper down
Bank signals rate hike is distant • Full normalization will take years
RIGA/FRANKFURT (Reuters) – The European Central Bank announced on Thursday it would wrap up its unprecedented bond purchase scheme by the close of the year, its biggest step in dismantling crisis-era stimulus a decade after the start of the euro zone’s economic downturn.
But in a balanced announcement reflecting the uncertainties hanging over the region’s economy, it also signaled the move would not mean a rapid policy tightening by adding that interest rates would stay at record lows “at least through the summer of 2019 and in any case for as long as necessary.”
The new rates guidance prompted the euro to reverse initial gains to fall over 1% to $1.1670, close to its biggest one-day loss since October. Markets had been anticipating a 10-basis-point hike in the ECB’s benchmark deposit rate – currently at -0.4% – by June 2019.
ECB President Mario Draghi declined to give more detail about the timing of rate moves in a news conference after the policy meeting, this time held away from the bank’s Frankfurt headquarters in the Latvian capital Riga.
“We didn’t discuss when to raise rates,” he said.
“This decision has been taken in the presence of a strong economy with increasing uncertainty,” he said of a political landscape characterized notably by rising trade tensions between the United States, Europe and China.
The ECB also downgraded its euro zone growth forecast for this year to 2.1% from 2.4% previously, while upgrading its inflation forecast to 1.7% from 1.4% , largely as a result of rising oil prices.
“This is a very fine balance– a bit more hawkish on QE, but rather dovish on rates – that Mario Draghi hopes will keep the markets on an even keel and avoid a taper tantrum,” said Neil Wilson, chief market analyst for Markets.com.
Though full policy normalization will take years, investors are already braced for the end of easy money from the world’s central banks. A hawkish US Federal Reserve dropped a crisis-era stimulus pledge on Wednesday while the ECB had already begun rolling back support after a five-year run of economic growth.
The ECB said the monthly pace of its net asset purchases would be halved to €15 billion from September until the end of December 2018, at which point purchases would end.
By putting a specific enddate on its stimulus, the ECB is taking a more decisive step than when the US Federal Reserve started its own taper in December 2013.
While inflation has remained weak, higher oil prices, increasingly evident wage pressures and record employment suggest that prices will be moving up in the coming years, even if more slowly than the ECB had originally hoped.
ECB Chief Economist Peter Praet, a Draghi ally and one of the most dovish members of the rate-setting Governing Council, recently argued that progress has been made on the inflation criteria, a strong hint that stimulus would be pared back.
The euro’s 5% fall against the dollar since April is also helping the ECB as the weaker currency is increasing the cost of imports and boosting inflation. While a rebound is likely, the US Fed’s tightening stance will limit the potential for a big rise in the euro.