Draghi calls for caution as stimulus heads to exit
European Central Bank (ECB) President Mario Draghi ( pictured) warned the apex bank would remain cautious even as he put his signature stimulus measure on the road towards an exit. Starting in January, the ECB would take a step towards ending one of its more controversial tools by cutting monthly purchases of public and private debt to ^30 billion, or half the current pace. The shift in stance comes six years into Draghi’s presidency.
Mario Draghi warned that the European Central Bank (ECB) will remain cautious even as he put his signature stimulus measure on the road toward an exit.
Starting in January, the ECB will take a step toward ending one of its more controversial tools by cutting monthly purchases of public and private debt to ^30 billion ($35 billion), or half the current pace. The shift in stance comes six years into Draghi’s presidency, a new phase after his unprecedented actions to prevent the break-up of the euro area and stave off deflation.
The decision “reflects growing confidence in the gradual convergence of inflation rates towards our inflation aim on account of the increasingly robust and broad-based economic expansion,” he said in a press conference after Thursday’s Governing Council meeting. “At the same time, domestic price pressures are still muted overall, and the economic outlook and path of inflation are conditional on support from monetary policy.”
While Draghi toned down his language, saying the euro area still needs “ample” stimulus instead of the “substantial” used in previous statements, he emphasised the need to tread carefully as long as consumer prices remain weak. There will not be a “sudden end” to the program, and the reduction is “not tapering,” he said. The updated plan will take total QE holdings to at least ^2.55 trillion.
Investors read the decision as dovish, sending the euro and bond yields lower. The single currency was down 0.9 per cent at $1.1704 at 5:07 p.m. Frankfurt time.
The nine-month extension “serves to push rate-hike expectations really far out,” said Holger Sandte, chief European analyst at Nordea in Copenhagen. “One can justify that by the inflation outlook. The task of somehow making monetary policy more normal, that will then fall to Draghi’s successor in late 2019.”
The ECB president said the decision wasn’t unanimous. A key point of dissent among some policy makers has been whether or not to set a firm end date for purchases, after some ECB officials have expressed concern that there is little more than ^200 billion worth of space left before they run into constraints.
“I would characterise the discussion as ranging between consensus, broad consensus on some issues and large majority on others,” Draghi said. The decision to keep purchases effectively openended was taken by large majority, he said.
Draghi did stress that reinvesting proceeds from maturing assets is an “important” part of QE policy, signaling it may cushion some of the effects of reducing net purchases. The ECB announced in a press release that it would publish reinvestment amounts monthly.