The European Central Bank says it will phase out the bond-buying stimulus programme credited with helping the 19 countries that use the euro recover from the Great Recession and eurozone debt crisis.
The bank said after a policy meeting of its 25-member governing council that the stimulus programme’s bond purchases would be reduced to 15 billion euros (£13 billion) a month — from the current 30 billion euros (£26 billion) — from October. They would then be wound up completely after December.
The bank was careful to underline that it would withdraw support for the economy only gradually, saying its key interest rates would not rise from record lows until at least summer next year, and could stay low for longer if needed.
“The ECB’s announcement that it will end its asset purchases in December is probably a little bolder than markets had expected, but this is tempered by the pledge to keep interest rates on hold for more than a year,” said Jennifer McKeown, chief European economist at Capital Economics.
The bank’s move towards the exit comes a day after the US Federal Reserve decided to make its second interest rate increase this year and indicated more were coming.
The central banks are withdrawing stimulus efforts that started during the Great Recession as their economies strengthen.
ECB president Mario Draghi says the bank’s policy of easy money has helped create millions of new jobs, with unemployment falling from over 12% during the crisis to 8.5%.
The eurozone was also hit with a crisis over high debt in Greece, Italy, Portugal, Ireland, Spain and Cyprus, followed by a period of worryingly low inflation that suggested the economy remained weak.
The decision indicates the ECB is relatively confident about the recovery despite slower growth recently. It was also not deterred by questions about the new populist government in Italy.
The coalition between the anti-establishment 5-Star Movement and the anti-immigration League have promised spending that could lead to Italy violating eurozone limits on deficits. At various times the parties have also questioned Italy’s membership in the euro itself.
The country’s finance minister has, however, helped calm markets by saying recently that his country had no intention to leave.
People are paying attention to the bond purchase exit because it will have wide-ranging effects in markets and the economy.
The purchases, which pump newly created money into the financial system, have driven down longer-term interest rates for borrowers such as governments and home buyers but have reduced returns for savers and made it harder to fund pension savings due to low returns on safe investments.
The stimulus has also pushed up the prices of investments likes stocks and bonds. As the stimulus is ended and then withdrawn by letting the bond holdings run down over a period of years, those effects will go into reverse. More conservative investments will become relatively more attractive.
The ECB’s mission is to keep prices growing at a steady and modest pace of just under 2% annually. It enacted stimulus as the region was afflicted with an extended period of very low inflation.
Inflation has recovered — it was 1.9% in May — but the bank must be able to show that inflation will stay in line with its goal even after the stimulus has been stopped.
The bank’s short-term interest rate benchmark remained at a record low of zero and its rate on deposits from commercial banks stayed at minus 0.4%. That is a penalty aimed at pushing banks to lend the money instead of leaving it at the central bank.