ECB to quit mass bond buying
• Move is subject to data confirming medium-term outlook for inflation
The European Central Bank (ECB) will end the mass bond buying used to buttress the eurozone economy in December, in a sign of confidence in the outlook for growth and inflation in the bloc.
“After September 2018 … we will reduce the monthly pace of the net asset purchases to €15bn until the end of December 2018 and then end net purchases,” ECB president Mario Draghi said in the Latvian capital, Riga.
But Draghi injected a note of caution by making the step “subject to incoming data confirming our medium-term inflation outlook”.
The ECB’s bond buys, set at €30bn a month, and ultralow interest rates are designed to stoke growth in the 19-nation single-currency area and power inflation to the bank’s target of just below 2%. More than three years after Draghi unleashed the “quantitative easing” programme, he said a review of economic data and internal ECB forecasts had convinced policy makers they were on course to reach the inflation goal. “The news are not as good as they were a quarter ago, but they are still solid,” he said.
The eurozone appears slightly winded after a string of positive economic data in 2017. Growth slowed in early 2018, at 0.4% between January and March compared with 0.7% in the previous three months.
“We may well have this soft patch being somewhat longer … in some countries,” Draghi said, noting that the latest ECB projections include a downgrade in 2018’s economic growth forecast from 2.4% to 2.1%.
But “the underlying strength of the economy in the medium term is what we assess to be adequate”, he said.
The central bank sees inflation more firmly on course, upgrading its predictions for 2018 and 2019 from 1.4% to 1.7%.
Price growth surged to 1.9% in May, with higher oil prices the biggest factor lifting it to the ECB’s target. Core inflation remains weak, but the data suggest that quantitative easing has dispelled the risk of deflation, or a downward spiral of prices braking economic activity.
Draghi tried to reassure observers by promising that the current record-low interest rates will “remain at their present levels at least through the summer of 2019”.
Meanwhile, the ECB will continue to reinvest its enormous, €2.4-trillion stock of bond holdings “for as long as necessary” to ease access to finance for firms and households in the eurozone.
“The meeting marks another important step towards a gentle end to QE [quantitative easing], but … it does not mark the start of monetary tightening”, ING Diba bank analyst Carsten Brzeski said.
The euro slid immediately following the announcement, falling from $1.1818 ahead of the policy announcements to $1.6425 in early afternoon trading, down 1.27% on the day.
While the ECB’s move is more definitive than some had expected, economist Frederik Ducrozet of Pictet bank highlighted via Twitter that its commitment to “tapering” or winding down bond purchases is “not an iron-clad one”.
Making the reduction in bond purchases “subject to incoming data” means governors are “retaining some flexibility, although the bar for policy change is arguably very high”, Ducrozet wrote.
ECB chiefs may have felt the need for a fallback option when casting an eye over the long list of threats to the eurozone expansion.
Top of the list are unpredictable spending policies from the new Italian government that could pitch the bloc’s third largest economy into a financial crisis, although fears for the sustainability of Italy’s debt have calmed. The prospect of a failure to reach a Brexit deal with London remains as real as before, while higher oil prices could weigh on eurozone growth.
An acrimonious end to the Group of Seven summit heightened the risk of a trade war between EU nations and US President Donald Trump.
“If we undermine the multilateral framework that has accompanied our existence since the Second World War … we are going to create very serious damage,” Draghi said.