ECB charts end to easy money

To halve monthly bond purchases

FRANKFURT: European Central Bank governors yesterday began weaning the euro zone economy off the high doses of support they prescribed in recent years, but they remain far away from reaching their elusive inflation target.

“From January, the ECB will reduce its purchases of government and corporate bonds to €30 billion ($35 billion) per month,’’ a spokesman said, down from €60 billion at present — in line with analysts’ expectations.

Policymakers left themselves a ninemonth horizon to decide on the next step for the programme, with a move due by September 2018.

The move is a sign that the ECB sees less need for it to pump cash into the financial system to support lending to businesses and households, a key factor in the economic recovery that has pushed growth up and unemployment down in the euro zone.

Meanwhile, interest rates remain at historic lows as another incentive for loan growth, with the central bank sticking to its negative deposit rate — meaning it charges ordinary lenders to park their cash with it.

“Today’s decision is a sea-change but a very gentle one, not a big-bang U-turn,” ING Diba bank economist Carsten Brzeski commented. “The ECB wants to start the exit as cautiously as possible.”

The ECB’s partial retreat from its massive interventions in the 19-nation single currency area comes despite the policy’s failure so far to achieve inflation in line with its target of just below 2%, which is seen as the optimal level to encourage steady economic growth.

Euro zone inflation was stable at 1.5% in September.

The ECB began buying massive amounts of bonds in 2015 to fight the threat of deflation — a damaging downward spiral of prices and activity.

Since then, the state of the euro zone economy has improved — even after a first reduction in purchases last April, from €80 billion to €60 billion per month.

In the first half of this year, euro zone economic growth powered to 2.4% in annualised terms, outdoing even optimistic forecasts, while unemployment has fallen to an eight-year low of 9.1%.

ECB policymakers say they have made it easier for businesses and households to borrow sorely-needed money for spending, investment or hiring.

The latest figures released by the ECB yesterday showed lending by euro zone banks to businesses and households grew by 2.7% last month, faster than August’s 2.6% pace and continuing an upward trend.

“Monetary policy measures introduced by the ECB since June 2014 have played a pivotal role in supporting the economy,” the bank’s chief economist Peter Praet said earlier this month.

Some on the ECB’s governing council long remained reluctant to withdraw their powerful medicine, fearing they might nip the recovery in the bud by tightening access to money — a fate that the US Federal Reserve suffered in 2013.

Meanwhile, other governors have warned of the risks of easy money, arguing it has softened the market discipline that usually restrains households, businesses and states from borrowing too much.

That could lead to credit-fuelled price bubbles in some sectors, with some pointing to rising property markets in popular euro zone cities.

Meanwhile, observers highlight technical limits that will prevent the ECB from continuing to buy bonds indefinitely.

By lowering the amount it spends on bonds each month, but extending the duration, the bank can keep supporting the economy — even as it acknowledges healthier growth and makes a concession to fears it has gone too far.

The ECB will have bought some €2.5 trillion of bonds come September.

It pledged yesterday that it would keep reinvesting the proceeds of those bonds, allowing it to continue influencing the market beyond the date when it finally ends the scheme.