ECB announces end of QE programme
The European Central Bank is ending its €2.6trn bond-buying programme despite growing concerns over the possibility of an economic slowdown.
The central bank said on Thursday that although it would stop its stimulus programme, it would continue reinvesting the proceeds of bonds bought under Quantitative Easing programme, but which are now maturing.
“Growth, as reflected in the ECB’s own forecasts, remains tepid. This means that the monetary tightening cycle will be glacial and pressures of fiscal policy will only grow in the coming year...” Michael Metcalfe, global head of macro strategy at SSGM
The eurozone institution explained that reinvestments would continue for an extended period of time past the date when it started raising interest rates, and that in any case they would last for as long as necessary to maintain favourable liquidity conditions.
Alongside the ECB's plans to reinvest maturing bonds bought under QE, the central bank has announced it is not planning to raise interest rates until past the summer of 2019. "And in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, two per cent over the medium term," the ECB said.
Although the move was broadly expected, some market commentators have expressed their concerns over its impact on the current state of the economy.
Michael Metcalfe, global head of macro strategy at State Street Global Markets, says: "It is ironic that Quantitative Easing will end this month, despite the backdrop of mounting pressure on European governments to expand their fiscal deficits. However, it is no coincidence, as the end of QE is the ECB's first-step in a long and gentle path to removing policy stimulus.
"… Growth, as reflected in the ECB's own forecasts, remains tepid. This means that the monetary tightening cycle will be glacial and pressures of fiscal policy will only grow in the coming year. This in turn will keep the market focused on the details of ECB's reinvestment policy for what little official support will remain for sovereign bond markets going forward."
Antoine Lesné, head of EMEA strategy and research for SPDR ETFs at State Street Global Markets, adds: "As expected, the end of net asset purchases was confirmed and is a first step in a gradual normalisation of monetary policy. However, while recent economic numbers like the Industrial Production Index were less alarming than previous economic data, there is a loss of economic momentum at play in the eurozone, which was acknowledged by President Draghi last week. This backdrop means that rate normalisation will be slow, gradual and dependent on growth pick up.
"Market focus has now started to shift towards the ECB's reinvestment policy and the potential to use other accommodative measures, should there be a need to support the economy and inflation targets. Given where core bond yields are currently trading, there will be little support at such low levels in the new year, leading us to favour shorter duration exposures to mitigate some of the interest rate sensitivity in portfolios."
The ECB had announced in June that it would reduce its bond-buying programme from €60bn a month to €30bn a month for an initial nine-month period, which would start on January to last by the end of September 2018.
That decision to trim the stimulus programme came after further data suggested the eurozone economy responded well to such monetary policy "medicine".
"The governing council anticipates that, after September 2018, subject to incoming data confirming the governing council's medium-term inflation outlook, the monthly pace of the net asset purchases will be reduced to €15bn until the end of December 2018 and that net purchases will then end," stated the ECB in a Riga meeting on the 14 of June.
The ECB launched the Quantitative Easing (QE) programme in January 2015 and started buying bonds in the spring of the same year seeking to stave off weak demand and frozen inflation in the eurozone.
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