ECB Reaffirms December End To Bond Buying (QE)

by Ike Obudulu Posted on October 25th, 2018

The European Central Bank on Thursday signaled determination to, at the end of this year, wind up its massive asset purchase program, which was implemented in 2015 to support the economy.

As announced in June, the ECB halved its monthly bond purchases to EUR 15 billion this month, and said it will continue so till the end of December.

“The Governing Council anticipates that, subject to incoming data confirming the medium-term inflation outlook, net purchases will then end,” the bank said on Thursday.

The ECB said it intends to reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of the net asset purchases.

The Governing Council, led by ECB President Mario Draghi, left its interest rates unchanged for a third consecutive policy session.

The main refi rate is currently at a record low zero percent and the deposit rate at -0.40 percent. The marginal lending facility rate is 0.25 percent.

“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 the continued sustained convergence of inflation to levels that are below, but close to, 2 percent over the medium term,” the ECB said in a statement following the conclusion of the Governing Council meeting in Frankfurt.

Economists expect the central bank to hike interest rates in the second half of next year.

Draghi is set to hold his customary post-decision press conference at 08.30 am ET, when he is expected to face several questions regarding the stand-off between his home country Italy and the European Union regarding the former’s budget plans.

“As this recent turmoil is a battle between Italy vs Brussels and Italy vs the market, the ECB will only voice its awareness of the situation and refer to the already established procedures should the ECB be involved,” Danske Bank analysts said. “Therefore, we expect the ECB will stay side-lined for now.”

Draghi told European lawmakers late September that the bank expects a “vigorous pick-up” in the underlying inflation in the coming months.

Latest data from Eurostat, however, showed that core inflation that excludes energy, food, alcohol and tobacco, was unchanged at 0.9 percent in September after a downward revision to August’s figure.

Recent data have been mixed, suggesting some loss of momentum in the euro area economic activity.

Turbulence in global stock markets, especially in emerging economies, trade tensions, high oil prices and the drawn-out Brexit discussions also add to the downside risks to the Eurozone economic outlook.

But none of these have materialized, ensuring that the solid domestic demand, which at the present is the linchpin for euro area growth, remains intact.

Eurozone private sector expanded at the weakest pace in over two years in October, the latest purchasing managers’ survey by IHS Markit showed on Wednesday, as an export-led slowdown continued to broaden-out to the service sector amid weak manufacturing performance.

In September, the ECB Staff trimmed the growth projections for this year and next to 2 percent and 1.8 percent, respectively.

EARLIER :  ECB to End Bond Buying (QE) In December

The European Central Bank, ECB, announced today that it will end its bond buying (quantitative easing) program by the end of this year. If incoming data followed its forecasts, then its monthly bond purchase program would be extended through to the final quarter of the year.  ECB also pledged to keep interest rates unchanged at current record lows at least through the summer of 2019.

Until now, this quantitative easing (QE) program was scheduled to last until September, carrying monthly purchases of 30 billion euros ($35 billion) of government and private debt. This will now be reduced to 15 billion euros during the last three months of 2018.

The landmark decision sets the euro area up for an exit from years of massive monetary support.

President Mario Draghi will explain the decision in a news briefing at 3:30 p.m. in Riga, Latvia, where the Governing Council met.

With the decision to retire its key crisis-fighting tool, the ECB is betting that the euro-area economy is robust enough to ride out an apparent slowdown amid risks including trade tariffs and nervousness that Italy’s populist government will spark another financial crisis.

The announcement comes only hours after the Federal Reserve raised U.S. interest rates for the second time this year, highlighting how a decade of easy money globally is gradually coming to an end.

The People’s Bank of China opted not to follow the Fed in raising borrowing costs, and the Bank of Japan is expected to maintain its stimulus when it meets on Friday.

Draghi will provide updated economic projections at his news briefing, which may help him address any questions over whether policy makers have acted too hastily given a spate of disappointing data in recent weeks. While almost a third of economists in a Bloomberg survey predicted he’d set an end-date for purchases after the Riga meeting, 46 percent said he’d wait until the next policy session in July.

Communicating an end to quantitative easing would mark a first step toward relinquishing some of the ECB’s unconventional policy tools, which also include negative interest rates.

It is four years to the month since the ECB became the first major central bank to cut one of its key rates below zero. Market expectations are currently for rates to start rising around the middle of next year, and some Governing Council members recently said such an outlook is reasonable.

As policy makers give up net asset purchases as stimulus tool, they’ll stress other measures that will keep their policy stance accommodative, such as the stock of debt bought under QE, reinvestments of maturing bonds and low borrowing costs.

The euro and bond yields dropped after the ECB said it’ll phase out the stimulus tool with 15 billion euros ($17.7 billion) of purchases in each of the final three months of the year.

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