The headline-grabber outcome of the ECB meeting today was the announcement of an end-date for the QE programme: the ECB now anticipates net purchases to grind to a halt at the end of this year. However, the decision was hardly a surprise, following the hints from the ECB’s Chief Economist Peter Praet two weeks ago. Importantly, the ECB made sure to keep in place significant accommodation by strengthening its forward guidance on rates and it retained plenty of flexibility should circumstances change going forward.
As largely expected, the ECB announced an extension of QE net purchases at a slower monthly pace of €15bn after September and until the end of the year. According to Draghi, recent “substantial progress” in the inflation adjustment towards the ECB’s 2% target justifies further tapering and the conclusion of the QE programme. Of course, the process is conditional on development in incoming data but it feels like the bar for disappointment is quite high. Other tools remain in place to facilitate the inflation adjustment, most notably a strengthened forward guidance stating the first rate hike will take place in summer 2019 at the earliest. In addition, the stock of ECB holdings – set to hit €2.6tn (22% of GDP) by the end of the year – will remain large, as the reinvestment policy will persist for an indefinite time.
Going forward, the ECB’s path of monetary policy normalisation will likely remain gradual, cautious and predictable. The ECB will likely replicate the steps taken by other major central banks at more advanced stages of the normalisation cycle over the next few years. However, the emergence of new risks complicates the picture. Trade tensions and increased volatility in financial markets are now mudding the outlook. In addition, the eurozone would not be immune to a slowdown in the US, where the business cycle is at a later stage and the vulnerability to policy errors is higher. For this reason, the ECB’s plan for the final stages of monetary policy normalisation might end up being shelved, before they are given serious consideration.