The European Central Bank (ECB) headquarters is pictured in Frankfurt, Germany, December 8, 2016. REUTERS/Ralph Orlowski
FRANKFURT: The European Central Bank (ECB) on Thursday extended its mass bond-buying programme, but at a slower pace than analysts had expected, as it offers continued support to a fragile eurozone recovery.
Sluggish growth, below-target inflation, the election of Donald Trump, and the resignation of Italian Prime Minister Matteo Renzi prompted most observers to predict quantitative easing would be extended beyond its March 2017 expiry date to December 2017.
But the bank said it would decrease the pace of bond-buying to 60 billion euros (RM283bil) per month from the 80 billion (RM377bil) that have been in place since March.
The bank’s governing council also voted to keep key interest rates unchanged at record lows at the last meeting of the year, a spokesman said.
Some observers have warned that any sign the bank was “tapering” -- or winding down its purchases -- could spook bond markets, pushing up the cost of financing in the single currency area.
”Even without calling this tapering, the ECB just announced tapering,” said economist Carsten Brzeski of ING-Diba bank.
”Whether it was a wise decision or whether the ECB could end up in a taper tantrum... remains to be seen,” he went on, referring to the rise in US treasury yields when the Federal Reserve moved to end its own QE programme in 2013.
A Bloomberg News report in October that QE might be on the way out troubled bond markets.
But on Thursday, however, the benchmark German 10-year bond yield actually declined in reaction to the ECB move as investors bought into bonds.
European stock markets also extended earlier modest gains.
Political risks
ECB watchers have warned that the fragile recovery in the eurozone could be undermined by any sign central bank support is on the wane.
Euro area inflation hit a two-and-a-half-year high in November at 0.6%, but remains far short of the central bank’s target of just below 2.0%.
Meanwhile, economic activity in the eurozone could suffer if Trump implements protectionist promises in the US made on the campaign trail.
And the 28-country European Union has worries of its own, with Britain headed for the exit door, Italy destabilised by the resignation of Renzi, and elections in the key eurozone economies of France and Germany next year.
The bank pointed towards these uncertainties on Thursday by insisting that if “the outlook becomes less favourable... the Governing Council intends to increase the programme in terms of size and/or duration.”
”The ECB kept all its options open,” said economist Holger Schmieding of Berenberg bank.
”Draghi should not find it too difficult to justify the ECB decision.”
Growing pressure
Extending QE on Thursday may be the last hurrah for the expansionary monetary policy that has marked ECB president Mario Draghi’s term in office.
”Discussion about the potential negative side effects of the ECB’s aggressive stance has intensified,” Schmieding noted.
Some ECB policymakers have hinted that with forecasts showing inflation rising steadily into 2018 it is time the stimulus was withdrawn.
”How long a chosen monetary policy course is held must exclusively be determined by what’s necessary to ensure price stability,” Jens Weidmann, head of Germany’s Bundesbank central bank and ECB board member said in Munich on Monday.
Banks regularly grumble that low interest rates are hurting their business, and influential German economists have repeated calls in recent weeks for the ECB to end its bond-buying.
Reducing the pace of bond purchases was “a step in the right direction,” commented Clemens Fuest of the influential Ifo think-tank in Munich on Thursday -- even if he would have preferred to see a faster exit from QE.
Financial tightening
ECB monetary policy is designed to make access to credit easier for businesses and consumers, powering a recovery with investment and consumption.
Cutting off that support too soon or too suddenly could halt the eurozone’s return to stable growth in its tracks by curtailing access to credit, the ECB fears.
Along with the language designed to reassure that bond purchases could always increase again, the bank offered a further signal on Thursday that its support will not be yanked away.
”The Governing Council decided to change some of the parameters of the APP,” the ECB spokesman said, adding that Draghi would offer further details at his press conference later Thursday. - AFP
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