ECB to end bond-buying programme

frankfurt — The European Central Bank said on Thursday it will end its unprecedented bond purchase scheme by the close of the year, taking its biggest step in dismantling crisis-era stimulus a decade after the start of the euro zone’s economic downturn.

Signalling that the move would not mean rapid policy tightening in the coming months, the bank also said that interest rates would stay at record lows at least through the summer of 2019, suggesting protracted support for the economy, even if at a lower level.

Markets had been pricing in a 10 basis point hike in the ECB’s benchmark deposit rate — currently at -0.4 per cent — by June 2019. The new guidance prompted the euro to reverse initial gains against the dollar of up to 0.5 per cent and fall to $1.1744, 0.4 per cent down on the day.

Though full policy normalisation will take years, investors are braced for the end of easy money from the world’s top 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 monthly pace of the net asset purchases will be reduced to €15 billion until the end of December 2018 and... net purchases will then end,” the ECB said in a statement after policymakers met in the Latvian capital Riga.

By putting a specific end date on its stimulus, the ECB is taking a more decisive step than when the US Federal Reserve started its own taper in December 2013. Then, it did not commit to a specific end or any subsequent steps.

The decision affirms market expectations for the bond purchases to conclude by year-end after a short period of tapering, and indicates that interest rates will once again become the bank’s primary policy tool.

Attention then turned to Mario Draghi’s 1230GMT news conference, during which the ECB president was to provide a fuller explanation of the policy moves and unveil fresh economic projections.

“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,” the ECB said.

The biggest complication for the process of normalisation could be a murky economic outlook, muddied by a developing trade war with the United States, a populist challenge from Italy’s new government and softening export demand.

But ECB policymakers have long argued that their mandate is to bring inflation back to target, not to prop up growth or fight off market turbulence in any particular country.

Italian bond yields rose sharply this month as a new government of anti-establishment parties promised higher spending. That threatens a clash with Brussels, which is pushing Rome to cut the eurozone’s second-biggest debt pile.

A broader slowdown could make it harder for the ECB to cut support if lower growth eases pressure on inflation, a threat to the bank’s credibility as it has missed its inflation target of almost two per cent for over five years.

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. —