ECB outlines plan to run down quantitative easing

The European Central Bank (ECB) has announced that it is to run down its programme of quantitative easing, cutting the amount of bonds its buys from €60 billion per month to €30 billion from next January.

The programme has been extended from the end of this year to September 2018, and possibly beyond.

The ECB left its interest rates unchanged, and said it expects rates to remain at current levels for an “extended period of time”, and well past the end of the quantitative easing purchasing.

This indicates that ECB rates are not set to rise until well into 2019 at the earliest.

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The announcement was broadly in line with market expectations.

The ECB’s decision to maintain its option to increase or extend the bond buying programme is an apparent victory for policy doves who argued that they should not commit to ending the buys since possible euro gains could exacerbate weak inflation.

Designed nearly three years ago to fight off the threat of deflation, the bond purchase scheme has cut funding costs, revived borrowing and lifted growth, even if it ultimately failed to raise inflation back to the ECB’s target of almost 2 per cent.

“If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the governing council stands ready to increase the asset purchase programme in terms of size and/or duration,” the ECB said in a statement.

The ECB added that its main refinancing operations and the three-month longer-term refinancing operations will continue to be conducted as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the last reserve maintenance period of 2019.

Hawks such as Germany and the Netherlands wanted a commitment to end bond buys arguing that growth is now above trend and that more purchases do next to nothing for inflation.

Doves on the bloc’s periphery meanwhile warned that a rapid exit could tighten financial conditions, undoing years of work.

The broader outlook is as good as it has been since before the global financial crisis. An unbroken growth streak has created seven million jobs and the expansion is now self-sustaining, driven by domestic consumption.

Banks are better capitalised, lending is growing, and divergence between the core and the periphery, the biggest failure of the currency project, appears to have halted.

Inflation, however, is expected to miss the ECB’s target of almost 2 per cent at least through the decade as labour market slack remains large, keeping a lid on wages and supporting the case for continued support.

The ECB is also slowly running out of bonds to buy in some countries, suggesting that market constraints will play an increasingly large role in the policy debate as a major redesign of rules risked sending the wrong signal when the bank is working on an exit strategy.

-Reuters