After pumping more than €2 trillion into the economy, the European Central Bank (ECB) has announced it is bringing its bond-buying programme of quantitative easing to an end this year.
Does this mean that the economies of the eurozone are back on a more stable footing following the global financial crisis of a decade earlier?
The ECB is currently buying €30bn a month of bonds.
It got off to a later start than other western nations, not starting its programme until 2015. This was years after the UK and US took similar measures to provide much needed liquidity to financial markets.
Bringing the programme to a close by the end of December, the ECB said in a statement it would halve the amount of asset purchases to a comparably modest €15bn a month after September. This does though rely on economic data remaining favourable.
The asset purchases would then be phased out entirely by the end of the year.
Their announcement comes despite a recent slowdown in the rate of economic growth in the eurozone, and also fears about a populist political uprising in Italy, with groups there proposing a withdrawal from the single currency.
Investors are also concerned about an escalating trade war with the United States and what this could mean for the eurozone economy.
Despite a recent slowdown in economic recovery, ECB president Mario Draghi has said underlying growth remains strong, with longer-term expectations for price inflation “well anchored” towards the ECB’s target of just under 2%.
The other part of the monetary easing deployed by the ECB has been keeping interest rates very low, near to zero.
Unlike the US and UK, where interest rates have been rising to combat rising price inflation, the ECB has held back on this aspect of monetary tightening.
Despite a recent jump in price inflation for the eurozone, from 1.2% in April to 1.9% in May, the ECB has left interest rates unchanged at its latest meeting and said they would remain unchanged “at least through the summer of 2019”.
This represents a more definitive set of forward guidance than previously offered by the ECB and could reassure investors against the backdrop of asset purchases being phased out over the next six months.
Silvia Dall’Angelo, Senior Economist at Hermes Investment Management, said:
The headline-grabber outcome of the ECB meeting [today] was the announcement of an end-date for the QE programme: the ECB now anticipates net purchases to grind to a halt at the end of this year. However, the decision was hardly a surprise, following the hints from the ECB’s Chief Economist Peter Praet two weeks ago.
Importantly, the ECB made sure to keep in place significant accommodation by strengthening its forward guidance on rates and it retained plenty of flexibility should circumstances change going forward.
Whether this decision to taper down QE net purchases will be justified with further progress towards the inflation target is yet to be seen. Hermes pointed out that the bar for disappointment feels quite high, as the process is conditional on development in incoming data.
By the end of the year, the ECB’s stock of bond holdings is forecast to reach €2.6 trillion, which represents around 22% of eurozone gross domestic product. Their programme of reinvestment will need to continue for some time, despite net asset purchases stopping.
On that basis, it could take many years before any of these bonds are re-sold to the markets, starting the process of unwinding the massive quantitative easing that has taken place.
