ECB Plans to Reduce QE Purchases to €30 Billion a Month

The European Central Bank will reduce its monthly bond purchases next year, a step toward ending a program that has already spent more than 2 trillion euros ($2.4 trillion) trying to revive euro-area inflation.

Policy makers agreed to scale back buying to 30 billion euros a month starting in January and continue for nine months until the end of September, a decision that was in line with economists’ estimates. The ECB also maintained its pledge to continue buying beyond the current deadline and/or increase the size of its monthly asset purchases if needed.

The decision marks a watershed moment for Mario Draghi, who heads into the final two years of his ECB presidency after a tenure spent easing policy to contain the fallout from the region’s debt crisis and stave off deflation. The 19-nation bloc is on track for its fastest expansion in a decade, and the central bank is betting that inflation is finally on the verge of picking up.

Reinvestment Plans

The Governing Council emphasized its plans for maturing debt, saying the proceeds will be reinvested for an “extended period of time after the end of its net asset purchases, and in any case for as long as necessary.” It also stressed that its refinancing operations — its loans to banks — will be conducted at a fixed rate and with full allotment for as long as needed.

Draghi has repeatedly said that “we aren’t there yet” on inflation, which was just 1.5 percent last month and which the central bank predicts won’t return to its goal of just under 2 percent before late 2019 at the earliest.

The Governing Council reiterated that it will continue to spend 60 billion euros a month on debt until the end of December. Officials kept the main refinancing rate at zero percent, the deposit rate at minus 0.4 percent and the marginal rate at 0.25 percent. They repeated a pledge that borrowing costs will stay at present levels until well past the end of net asset purchases.

The attention now turns to the news conference, where Draghi will face questions about his reasoning for the decision. He may stress that monetary policy will remain accommodative as the central bank’s debt holdings expand to 2.55 trillion euros by September and highlight an additional boost from the reinvestment of proceeds from maturing bonds.

Another core factor to be resolved is the availability of debt under the current QE rules. Some policy makers judge that the central bank has room to buy little more than 200 billion euros of bonds after December before it runs into shortages.

Bloomberg

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell