A key part of the very loose monetary policy in the eurozone has been the ECB’s quantitative easing programme, involving the large-scale purchases of bonds. Market attention in the run up to last week’s meeting of the ECB Governing Council was mainly centred on if it would provide guidance on the precise date it will end the purchases, writes Oliver Mangan.
Expectations on this front had been heightened by recent comments from some council members that the matter would be discussed at the meeting. The ECB had been guiding that net asset purchases would continue until the end of September 2018 or beyond if necessary. At present, the ECB is purchasing €30bn of assets each month under its quantitative easing programme.
After the meeting, the ECB said it would reduce monthly net asset purchases to €15bn in the final quarter of the year and then cease the purchases altogether at the end of 2018. However, it will still continue to replace bonds as they mature, thereby maintaining a large stock of assets on its balance sheet. Ending net asset purchases will mark a significant monetary policy change. However, the impact is mitigated by the fact that the ECB also unexpectedly indicated in its post-meeting statement that it will keep interest rates at their current very low levels “at least through the summer of 2019”.
Thus, the ECB is taking a very cautious approach to tightening policy. Interest rates in the eurozone are unlikely to start rising until the end of the third quarter of 2019 at the earliest, from their present 0% for the refinance rate and –0.4% for the deposit rate. Markets see rates staying very low for an extended period beyond that, only reaching 1% in spring 2023.
The reason for the ECB’s cautious approach to monetary tightening is its expectation that inflation will remain below the 2% target level over the next few years. Meanwhile, the ECB lowered its GDP growth forecast for 2018 from 2.4% to 2.1%, after slower growth in the first quarter of the year. The ECB continues to anticipate growth of 1.9% in 2019 and 1.7% in 2020.
Overall, it means while the ECB may end quantitative easing in December, interest rate rises remain a long way off which is good news for borrowers. Even when they do rise, the ECB and market indications are that rate rises will be very modest.
Oliver Mangan is chief economist at AIB
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