The European Central Bank has announced a cut in its bond-buying economic stimulus program, taking its biggest step yet towards unwinding years of loose monetary policy introduced in the wake of the financial crisis.
In what's believed to be a "less-but-longer" monetary policy decision, the European Central Bank (ECB) announced on Thursday it would reduce its monthly asset purchases from currently 60 billion euros ($50.7 billion) to 30 billion euros.
At the same time, however, the bank in charge of monetary policy in the euro currency area said the stimulus program, also known as quantitative easing (QE), would continue until the end of September 2018 — nine months longer than under previous policy. In a statement, the central bank also said that bond-buying could be extended even beyond that date "if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim."
While keeping interest rates unchanged at the historic lows of zero percent for the main refinancing rate and minus 0.4 percent for the deposit rate, the move is a nod to the economic recovery in the 19-country eurozone, which is now well into its fifth year.
Growth outshines inflation
Recent eurozone economic data has strengthened the ECB's case. An unbroken growth streak has created 7 million jobs and the expansion is now self-sustaining, driven by domestic consumption. Banks are better capitalized, lending is growing and divergence between the eurozone's core and the periphery appears to have narrowed.
Yet, the bloc's inflation rate is still missing the ECB's target of close to 2 percent as labor market slack remains large, keeping a lid on wages. Eurozone inflation currently stands at 1.5 percent, and few economists believe it will hit the ECB's target any time soon.
The ECB has promised to keep on buying assets until it sees "a sustained adjustment in the path of inflation consistent with its inflation aim."
But now the most important task for policymakers, including ECB president Mario Draghi, will be how to further reduce the bond-buying exercise without alarming investors and harming the economic recovery.
Euro, rates and limits
The main intend behind the ECB's move on Thursday is to push back expectations for the first rate rise in the eurozone to at least the first quarter of 2019.
Draghi has promised to keep interest rates on hold until "well past" the end of the bond-buying program. The commitment is essential for keeping recent gains for the euro currency against the US dollar in check, and so prevent a fall in inflation on the back of cheaper imports. Higher interest rates normally lead to stronger currencies.
Moreover, after spending a total of 2.4 trillion euros on its QE program the ECB is slowly running out bonds to buy in some countries, suggesting that market constraints will play an increasingly large role in the upcoming policy debate.
US investment bank Morgan Stanley said in a recent note to investors that continuing QE beyond September 2018 would require "an even more pronounced deviation from the capital key and/or relying to a greater extent on the corporate bond-buying program."
The newly-envisaged nine-month taper at a pace of 30 billion euros a month will commit the ECB to spending 270 billion euros. But analysts believe there are only about 300 billion euros of sovereign assets available for the bank to buy.
A QE rules change is however vehemently opposed by ECB Council hawks Germany and the Netherlands who think that the ECB should commit to stop buying bonds altogether.
uhe/nz (Reuters, AFP, dpa)