Enough is enough

ECB halts a major economic stimulus, and no one blinks

ECB sunrise 1800px AP
The ECB's quantitative easing slips into the sunset. Source: AP

The European Central Bank (ECB) confirmed a well-signposted exit from its gargantuan bond-buying stimulus this year, but wisely built in an escape clause for use if the economic recovery sputtered.

The ECB has been gradually removing the stimulus this year, taking note of a rebound in inflation and sustained growth at a healthy pace while keeping a wary eye on the effects of trade disputes, Brexit and turbulence in financial markets.

At Thursday’s policy-making meeting, the central bank’s executive board decided to halve its current bond purchases to €15 billion a month (€17.5 billion) from October, a level to continue only through December. The final departure from this program of so-called quantitative easing hinges on the strength of economic data that “confirm the medium-term inflation outlook.”

As expected, the central bank kept its main lending rate, as expected, at zero percent – where it has been since March 2016. The rate on overnight commercial bank deposits at the ECB was held at minus 0.4 percent.

The central bank has already indicated that interest rates will stay on hold till next summer, an unusually long horizon for policy guidance. Most analysts are assuming a tightening in the fall of 2019.

At a news conference, ECB President Mario Draghi trimmed the bank’s growth forecasts for this year and next, citing weaker foreign demand and external risks such as rising protectionism and financial market volatility. But he added: “The risks surrounding the euro area growth outlook can still be assessed as broadly balanced.”

Unshaken, unstirred

Global stock markets were unruffled by the announcements, while the euro gained around 1 percent against the dollar to €1.1680.

“When does a central banker know that he (or she) has done an immaculate job? When quantitative easing is brought to an end and financial markets could hardly care less,” said Carsten Brzeski, chief economist at ING Germany. “The ECB conducts the finest salami tactics,” said Bankhaus Lampe chief economist Alexander Krüger, referring to the central bank’s predilection for bit-by-bit policy changes.

The ECB’s purchase of sovereign bonds of euro-zone countries – more than €2.5 trillion to date – has been the central bank’s most potent weapon to jump-start inflation and stimulate demand in the wake of the financial crisis. But the scheme has produced mixed results, depressing borrowing costs and boosting inflation more slowly than hoped, while leaving the ECB’s arsenal of policy tools exhausted. Maturing bonds in the ECB’s portfolio will be replaced by new purchases, although the total amount won’t increase after December.

The central bank now sees euro-zone growth of 2.0 percent this year and 1.8 percent in 2019, down slightly from its previous estimate of 2.1 percent and 1.9 percent. The ECB stuck to its forecast of an annual 1.7 percent inflation through 2020 in the 19-member currency bloc, with Mr. Draghi insisting that was consistent with the bank’s medium-term target of near 2 percent.

Felix Holtermann covers finance for Handelsblatt. Jeremy Gray is an editor at Handelsblatt Global. To contact the authors: holtermann@handelsblatt.com, j.gray@handelsblattglobal.com

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