The ECB confirmed the end of its lavish bond-buying program on Thursday, bowing to the inevitable after nearly four years' quantitative easing. But faced with a limited arsenal to boost Europe’s tentative recovery, the central bank said it would reinvest the proceeds from maturing bonds, keeping its holdings constant for the time being.
Since the program began in March 2015, the ECB has bought €2.6 trillion ($3 trillion) in mainly sovereign bonds of euro-zone countries – bringing its balance sheet to about 40 percent of the bloc’s GDP – in order to prop up an economy still reeling from the aftermath of the 2007-08 financial crisis. The bank gradually ratcheted down its monthly purchases from €60 billion to €15 billion at present, ending this month.
As long as it takes?
The rollover of maturing bonds would “continue for an extended period of time, past the time when we start raising the key ECB interest rates,” Mario Draghi, the bank's president, told a news conference after the governing council’s policy-making meeting. This was a tweak from its previous guidance, that reinvestments would continue for an extended period after the bond buys ended.
As expected, the ECB left both its leading interest rate unchanged at zero percent and the rate for overnight loans to banks at -0.4 percent. Draghi reiterated the central bank’s earlier stance that the leading rate would remain steady through at least summer of 2019, with further adjustments subject to the economic outlook.
Draghi described the bank’s stance as “continuing confidence and increasing caution” with a view to growth prospects and global uncertainties. The reinvestment of the bond assets was crucial “for the sustained convergence of inflation to our aim,” meaning the ECB’s inflation target of “below, but close to 2 percent” in the medium term. “Significant monetary policy stimulus is still needed to support the build of inflation pressures,” the ECB’s boss said. Recent increases in wages and employment hadn't yet fed through fully into price increases, he added.
Euro slips on outlook
Draghi said that while domestic demand continued to underpin economic expansion in the euro area, the balance of risk was now tilted towards the downside. His comments caused a ripple in financial markets as the euro slipped 0.3 percent against the dollar and the yield, or annual return, on German 10-year bonds fell a basis point.
Pointing to a recent softening in Europe’s economy, the ECB said it had cut its growth forecasts by 0.1 point to 1.9 percent for 2018 and 1.7 percent for 2019 compared to its forecasts made only last September. For 2020, the central bank stuck to its expectation of 1.7 percent but saw only 1.5 percent in 2021.
Draghi confirmed that council members had touched on the topic of long-term funding of banks as a supportive measure, but had come to no conclusions. In 2014 and again in 2016, the ECB had extended Targeted Longer-Term Refinancing Operations to boost credit demand. Economists say a credit squeeze for these multi-year loans could emerge from mid-2019 if banks are unable to replace them with similar financing.
Jeremy Gray is an editor for Handelsblatt Today. Jan Mallien and Frank Wiebe are financial correspondents for Handelsblatt in Frankfurt. To contact the authors: [email protected], [email protected], [email protected]