The European Central Bank (ECB) is to begin weaning the eurozone countries off billions of euros of monetary stimulus, edging back to normality following the recovery from the depths of the sovereign debt crisis nearly a decade ago.
The central bank announced on Thursday it would halve its bond-buying programme – used to temper surging debt costs and stimulate lending to households and businesses – from €60bn to €30bn a month starting from January. The ECB pledged a gradual withdrawal of so-called “quantitative easing” to smooth the return to normality without rattling financial markets.
The euro marginally lost some ground against other major currencies following the announcement, expected by City traders due to previous hints from the ECB over the course of its actions.
The beginning of the process to unwind five years of unconventional monetary policy comes as eurozone growth gathers pace after years in the doldrums. The 19 countries out of the 28 European Union member states who use the single currency collectively grew at twice the rate of Britain in the three months to June.
Mario Draghi, the ECB president, said growth in the eurozone was solid and broad based. “The latest data and survey results point to unabated growth momentum in the second half of this year,” he said.
However, Draghi cautioned that loose monetary police – from quantitative easing and low interest rates – would be required for some time, despite the recovery, as the expansion in the eurozone remained conditional on significant support. This will mean the reduction in bond-buying will take place gradually.
The ECB left interest rates unchanged at 0% and its deposit rate, which it pays for banks to park money with it overnight, at -0.4%. When the rate is negative, banks pay the ECB to deposit money, encouraging them to lend rather than store it with the central bank.
From January the ECB will continue buying €30bn of bonds sold by countries in the euro area and the debts of eurozone companies on a monthly basis, which has the effect of flooding the banks that own them with money – which can in turn be lent to stimulate economic activity. The process also pushes down interest rates offered to customers, which makes new loans cheaper.
The ECB said it would continue the monthly acquisitions until the end of September 2018, or beyond, if necessary. It also said it could increase the purchases in terms of size and duration should the economy deteriorate.
The central bank will also continue to reinvest the proceeds from the bonds as they mature, over an “extended period of time” after the ultimate end of its purchasing programme. This is designed to help further smooth the unwinding process.
Speaking in Frankfurt following the announcement of the decision, Draghi said: “Our programme is flexible enough that we can adjust its size. We can carry through smoothly and that’s been the evidence we have given until now.
“It’s not going to stop suddenly. It’s never been our view that things should stop suddenly.”
Announcing the gradual reduction, which is credited with countering the risks of a fragmentation of the eurozone and preventing the single currency from unravelling, brings the ECB’s policy position closer to that of the US Federal Reserve, which has already begun unwinding its programme of bond-buying.
The US has gone further, by stopping the reinvestment of the proceeds of its own scheme, aiming to cut its $4.5tn (£3.4tn) balance sheet from October, initially by just $10bn per month.
Meanwhile, the Bank of England is yet to move to unwind its £445bn bond-buying programme. Mark Carney, the Bank’s governor, has said he would prefer to hike UK interest rates before beginning to withdraw quantitative easing.
Ian Stewart, chief economist at the accountancy firm Deloitte, said the ECB move amounted to “softly, softly” removal of loose monetary policy. “William McChesney Martin, a previous Fed Chairman, once said that the job of the Fed was ‘to take away the punchbowl just as the party gets going’. The ECB certainly isn’t taking away the punchbowl, Draghi is saying that so long as everyone keeps having a good time they plan to put less punch in,” he said.
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