The European Central Bank is to wind up its €2.4tn bond-buying programme by the end of the year, calling time on an extraordinary monetary programme that many economists credit with reviving the eurozone economy but which became increasingly divisive within the bank itself.
The ECB will halve the size of monthly asset purchases to €15bn after September and phase them out entirely after the end of the year. It left interest rates at record lows.
The eurozone grew by 2.3 per cent in 2017 but more recent indicators suggest the pace of expansion has flagged.
Many analysts thought the bank would only set out its plans for exiting QE in late July — even though there was widespread expectation that the programme would finish by the end of 2018.
The euro fell by 0.6 per cent against the dollar to $1.1725 on the day — failing to hold highs that initially lifted it by as much as 0.5 per cent — as cautious elements in the ECB’s approach influenced market reaction.
Adding an important caveat, the ECB said it would end additional bond purchases in December “subject to incoming data confirming our medium-term inflation outlook”.
Mario Draghi, ECB president, said the eurozone economy still needed “significant monetary stimulus” to hit its inflation target of close to 2 per cent. Thursday’s policy decisions were taken unanimously, he added.
“Today’s decision is a truly Solomonic compromise between the hawks and the doves. The hawks finally got their end-date for QE, while the doves still have their open door for more if needed,” said Carsten Brzeski, economist at ING.
The ECB’s move, taken at a meeting in Riga, brings it closer into line with the US Federal Reserve and the Bank of England, which have not only ended QE but also started raising rates.
In its most recent move, the Fed raised interest rates by a quarter point on Wednesday, the seventh increase of the current cycle and signalled that two more raises are likely this year. The US federal funds rate is now in a range between 1.75 per cent and 2 per cent, in marked contrast with the ECB’s use of negative and zero rates.
Central bank officials from Germany and other northern European countries argue that since growth is now stronger, it is vital to begin to normalise ECB’s bank’s approach so that it has more ammunition to deal with a future downturn.
They also contend that achieving sustainable growth depends on economic reform in more troubled eurozone economies such as Italy and Greece.
However, Thursday’s decision does not actually tighten monetary policy. Instead it makes clear that additional loosening via the quantitative easing programme will continue until the end of the year.
Only if and when the ECB stops reinvesting the proceeds of maturing bonds, will it begin to rein in the balance sheet it built up throughout QE, a move likely to push up corporate borrowing costs.
Policymakers in the single currency area remain cautious about when the QE stimulus should be withdrawn and on Thursday the bank confirmed its commitment to reinvest the bonds’ proceeds for “an extended period of time” after QE ends “and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation”.
Mr Draghi said the governing council had not discussed in further detail when it would stop reinvesting the proceeds of maturing securities.
The ECB added that it expected interest rates to “remain at their present levels at least through the summer of 2019”.
The benchmark main refinancing rate remains at zero and the deposit rate at minus 0.4 per cent.
The ECB has chosen to terminate QE when higher oil prices, political turmoil and the possibility of a trade war all threaten to weigh on growth. At the same time, wages are rising at a faster pace across the eurozone.
The ECB revised down its growth forecast for 2018 to 2.1 per cent from 2.4 per cent in its March projection. It still expects growth of 1.9 per cent in 2019 and 1.7 per cent in 2020.
It said inflation would hit 1.7 per cent this year, in 2019 and 2020. Three months ago, it had predicted inflation of only 1.4 per cent this year and next.