The European Central Bank has decided to scale back its landmark quantitive easing programme from €80bn to €60bn a month, in a move that responds to hawks’ concerns about ultra-loose monetary policy but which could unsettle markets.
The bank confirmed that it would buy €80bn a month of bonds under the current leg of the programme until March, but added that it would reduce the purchase size to €60bn for the nine remaining months of 2017.
The ECB argues that such a step is not equivalent to the US move to gradually “taper” QE that unsettled markets in 2013, but risks raising fears in financial markets that the bank is heading for the exit on QE.
The bank argues that its move need not reduce how many bonds it will eventually buy since cutting down the rate of purchases to €60bn a month, but for a longer period, could result in the ECB buying more bonds.
But it has been under pressure from hawkish elements within its governing council and from lawmakers in Berlin to begin reining in its support to the single currency area’s economy.
The bank said the purchases of €60bn a month would continue “until the end of December 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.”
In a sign of the sensitivity of the decision, it added: “If, in the meantime, the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the programme in terms of size and/or duration.”
The bank also kept its benchmark interest rate unchanged at zero and will continue to impose a fee of 0.4 per cent on deposits parked in its coffers. Both decisions were widely expected.
Thursday’s meeting, the most important in months, ultimately came down to a vote on the governing council’s level of confidence in the robustness of the eurozone’s recovery in an uncertain political environment.
The No vote in Italy’s referendum and elections in three of the eurozone’s five largest economies next year present risks to growth and have put markets on edge. Government borrowing costs have risen in response, especially in more troubled parts of the region such as Italy.
However, the single currency area’s recovery has remained solid, despite the UK’s vote to leave the EU and Donald Trump’s unexpected victory in the US presidential election. While inflation remains far below the target of just under 2 per cent, it has risen in recent months.
Mario Draghi, ECB president, will meet the press at 1:30pm UK time to explain the governing council’s decision. It is a particularly sensitive issue given the unpopularity of quantitative easing with monetary hawks in the governing council and in countries such as Germany, who argue that such measures allow governments to sidestep reforming their economies instead to boost growth.
Markets and journalists will be watching the ECB president’s comments closely to watch for further signals that the bank could at some point begin to taper its bond buying. Such a warning would appease the hawks, but could risk unnerving investors in the eurozone’s bond and equity markets.
The ECB has also been considering whether to revise its rules to allow it to buy a greater range of bond.
Such a move was until recently seen as vital by many analysts to address concerns that the central bank could run out of eligible assets to buy. However, those concerns have been soothed by a recent rise in government borrowing costs, which mean a much greater share of high-grade government bonds are now cheap enough for the ECB to buy. Any announcement on a revision in the rules would come in Mr Draghi’s press conference.
Mr Draghi will also publish updated versions of eurozone central banks’ staff economic forecasts. The most recent forecasts, published in September, were for growth of 1.7 per cent this year, 1.6 per cent in 2017 and 1.6 per cent in 2018. Inflation was expected to be 0.2 per cent this year, 1.2 per cent in 2017 and 1.8 per cent in 2018.
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