You are here

ECB to end bond buys but signals rate hike is distant

By Reuters - Jun 15,2018 - Last updated at Jun 15,2018

The President of the European Central Bank Mario Draghi arrives for a press conference following the meeting of the Governing Council of the European Central Bank in Riga, Latvia, on Thursday (AFP photo)

RIGA/FRANKFURT — The European Central Bank (ECB) announced on Thursday it would wrap up its unprecedented bond purchase scheme by the close of the year, its biggest step in dismantling crisis-era stimulus a decade after the start of the eurozone’s economic downturn. 

But in a balanced announcement reflecting the uncertainties hanging over the region’s economy, it also signalled the move would not mean a rapid policy tightening by adding that interest rates would stay at record lows “at least through the summer of 2019 and in any case for as long as necessary”.

The new rates guidance prompted the euro to reverse initial gains to fall over 1 per cent to $1.1670, close to its biggest one-day loss since October. Markets had been anticipating a 10-basis-point hike in the ECB’s benchmark deposit rate — currently at -0.4 per cent — by June 2019. 

ECB President Mario Draghi declined to give more detail about the timing of rate moves in a news conference after the policy meeting, this time held away from the bank’s Frankfurt headquarters in the Latvian capital Riga.

“We didn’t discuss when to raise rates,” he said.

“This decision has been taken in the presence of a strong economy with increasing uncertainty,” he said of a political landscape characterised notably by rising trade tensions between the United States, Europe and China. 

The ECB also downgraded its eurozone growth forecast for this year to 2.1 percent from 2.4 per cent previously, while upgrading its inflation forecast to 1.7 per cent from 1.4 per cent, largely as a result of rising oil prices.

“This is a very fine balance — a bit more hawkish on QE, but rather dovish on rates — that Mario Draghi hopes will keep the markets on an even keel and avoid a taper tantrum,” said Neil Wilson, chief market analyst for Markets.com.

Though full policy normalisation will take years, investors are already braced for the end of easy money from the world’s central banks. A hawkish US Federal Reserve dropped a crisis-era stimulus pledge on Wednesday while the ECB had already begun rolling back support after a five-year run of economic growth.

The ECB said the monthly pace of its net asset purchases would be halved to 15 billion euros from September until the end of December 2018, at which point purchases would end.

By putting a specific end-date on its stimulus, the ECB is taking a more decisive step than when the US Federal Reserve started its own taper in December 2013. Then, it did not commit to a specific end or any subsequent steps.

The biggest complication could be a murky economic outlook, muddied by the developing trade war, a populist challenge from Italy’s new government and softening export demand. 

But ECB policymakers have long argued that their mandate is to bring inflation back to target, not to prop up growth or fight off market turbulence in any particular country. 

Italian bond yields rose sharply this month as a new government of anti-establishment parties promised higher spending. That threatens a clash with Brussels, which is pushing Rome to cut the eurozone’s second-biggest debt pile. 

A broader slowdown could make it harder for the ECB to cut support if lower growth eases pressure on inflation, a threat to the bank’s credibility as it has missed its inflation target of almost 2 per cent for over five years.

 

Inflation

 

While inflation has remained weak, higher oil prices, increasingly evident wage pressures and record employment suggest that prices will be moving up in the coming years, even if more slowly than the ECB had originally hoped. 

ECB Chief Economist Peter Praet, a Draghi ally and one of the most dovish members of the rate-setting governing council, recently argued that progress has been made on the inflation criteria, a strong hint that stimulus would be pared back.

The euro’s 5 per cent fall against the dollar since April is also helping the ECB as the weaker currency is increasing the cost of imports and boosting inflation. While a rebound is likely, the US Federal Reserve’s tightening stance will limit the potential for a big rise in the euro.

up
32 users have voted.

Add new comment

CAPTCHA
This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.
1 + 1 =
Solve this simple math problem and enter the result. E.g. for 1+3, enter 4.

Opinion

Newsletter

Get top stories and blog posts emailed to you each day.