ECB announces a reduction in QE, keeps interest rates unchanged

ECB president Mario Draghi has announced Thursday that the central bank will keep eurozone interest rates and its bond buying stimulus programme unchanged. Interest rates therefore remain unchanged in a range from 0.25 pct down to -0.40 pct, with the bank stating it expects rates to "remain at their present levels for an extended period of time."

Mario Draghi ECB President

ECB president Mario Draghi has announced Thursday that the central bank will keep eurozone interest rates and its bond buying stimulus programme unchanged. Interest rates therefore remain unchanged in a range from 0.25 pct down to -0.40 pct, with the bank stating it expects rates to “remain at their present levels for an extended period of time.”

Figures released ahead of the announcement confirm that the eurozone’s economy grew by 0.6 pct in the three months to June, following growth of 0.5 pct in the first quarter of this year; meanwhile, the euro also edged up to $1.196 ahead of the decision  — its highest level since QE began.

Following the announcement it has jumped to over $1.204.

On the back of the euro’s surge, David Lamb, head of dealing at FEXCO Corporate Payments, tells What Investment:  “Mario Draghi is increasingly sounding like an unwilling passenger in a hot air balloon – unable to check the Euro’s relentless rise.

“With Eurozone growth forecasts revised up for both 2017 and 2018, Mr Draghi’s studiously dovish tone failed completely to extinguish the blue touchpaper lit by the bloc’s strong economic performance.

“The single currency’s response was as rapid as it was breathtaking – surging 1 pct against the Dollar to smash through the $1.20 mark. With the Dollar under pressure, as American jobs’ growth stalls and the US faces up to its second hurricane in as many weeks, the Euro was always likely to strengthen against the Greenback today. But, the Eurozone’s robust growth – and Mr Draghi’s coded admission that QE could be reined in after the ECB’s October meeting – turned a rise into a rout; $1.20 was once seen as a symbolic barrier for the Euro, but on this evidence it could easily become the new normal.”

 The ECB is currently buying 60 bln euros of bonds a month as part of its quantitative easing (QE) programme. However, further analysts expect this to be scaled back, given the eurozone’s recovery. They state that this is making the decision on when the bank begins to rein in QE more complicated:

“We think the central bank is trying to send the message that the degree of stimulus will be dialled down as the economy improves, but not removed altogether,” says Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

By keeping interest rates at this historical low, the governing council is continuing to impose a levy on lenders’ deposits within the region’s central banks.

Meanwhile, there is a general consensus forecast amongst analysts that the ECB will begin tapering QE from January, 2018. However, a final decision on how to taper QE isn’t expected until October, 2017; in addition the bank is starting to examine options for ending asset purchases.

The ECB’s QE programme started early in 2015 and is viewed as the impetus for the revival of growth in the region and for reducing the threat of deflation. Today, 7 September, sees the publication of a new estimate of euro area growth by the EU statistics agency; the region’s economy is seen to have expanded by 2.3 pct in the year to June – above forecasts – while inflation is just 1.5 pct, and therefore below the ECB’s target of almost 2 pct.

Inflation in the 19-nation bloc is 1.5 pct in August.

Ian Kernohan, economist at RLAM, tells What InvestmentIt is now less than four months until the current phase of the ECB asset purchase programme ends. The ECB was not expected to signal a reduction in quantitative easing at this meeting, but to leave the door open for an October announcement.

“Inflation is low and the Euro has strengthened, however for the first time in many years economic growth has surprised to the upside this year. The time has come to roll back further on the pace of monetary easing, and I would expect a decision at the next ECB meeting to reduce the pace of bond purchases in January.

Markets seem to broadly anticipate the ECB will hold off until 2019 before it raises interest rates. Kernohan says, “We are still a long way from a hike in key interest rates however, and the ECB expect these to remain at their present levels well past the current horizon for quantitative easing.”

The ECB has also raised its GDP forecast to 2.2 pct, from 1.9 pct. If this proves accurate it will signal the fastest rate of growth since 2007, when it managed 3.0 pct – admittedly, ahead of the financial crisis.

 

 

 

 

 

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