- The ECB has confirmed they will decrease quantitative easing (QE) from the end of December — until bond purchases fall from current levels of 5 billion euros a month to zero.
- This is a historic moment as the ECB president, Mario Draghi, terminates one of his most controversial policies.
- As a result, the ECB would continuously reinvest cash from maturing bonds for the near future.
- This officially marks the end of one of the largest stimulus plans in history (massive bond buying program).
The European Central Bank or ECB for short, will cease its large scale trillion dollar multi-trillion bond-buying program at the end of 2018. Despite this measure, the bank stated on Thursday it will reinvest proceeds from maturing bonds for an extended period of time regardless of anticipated interest rate hikes.
Also, the ECB kept standard interest rates fixed as market professionals will closely follow President Draghi’s press conference from 1:45 p.m. London time (8:45 a.m. ET) for further guidance.
As a result of this news, the Euro traded 0.2 percent lower at around 1.1381 against the U.S. dollar at around 13:45 p.m. London time.
The beginning of a new era without QE
The ECB’s actions were in line with european policymakers predictions from earlier this summer, which accurately forecasted the end of (QE) in 2018 as bond purchases plummet to zero. This was a trendsetting moment as ECB President Mario Draghi terminates one of his most disputable economic policies.
The ECB plans on using the large proceeds from trillions of maturing bonds to purchase additional debt, in order to ensure low borrowing costs through 2021. This open timeline should enable policymakers to extend the date at a somewhat low cost to credibility in case of a recession.
In order to rescue the eurozone economy from deflation and increase consumer confidence, The ECB instituted an asset purchasing program in which it bought more than 2.6 trillion euros ($2.9 trillion) — in March 2015.
These actions have been seen as a lifeline that helped revived the 19 member currency bloc after two recessions and a debt crisis.
“With the most prominent crisis-fighting measure of the ECB now almost back in the toolbox, the big question is, what will be next?” stated chief ING economist Carsten Brzeski. “It seems as if the ECB wants to keep as many cards as possible close to its chest,” Brzeski said.
This key decision is considered to be the end of crisis-era policies in the eurozone, despite difficulties in European economies.
ECB’s President Draghi: There are still many Global uncertainties
Italy is at odds with the European Commission due to its spending plans. France has overextended its budget by increasing pension payouts and handouts to low income workers to stop violent ‘yellow vest’ protests.
To make things more complex, Brexit motions has been rearing its ugly head. Theresa May, the British Prime minister survived a party no-confidence vote last Wednesday, despite not making progress from separating from the EU.
The beset British leader traveled to Brussels to ask for assistance from other European leaders, just weeks before parliament needs to pass a motion that could prevent a damaging exit from the member state.
How would this impact the Fed?
The ECB meeting precedes the Federal Reserve’s December meeting, where it’s predicted it would raise interest rates by 25 basis points (0.25 of a percent).
Yet, expectations for the Fed have drastically changed in the last month, as economists don’t expect a quarter point hike in March due to slower growth and a volatile stock market..
Futures markets have anticipated less than one increase for next year after next week’s highly predicted hike. The Fed has forecast three interest rate hikes for 2019, but this could be reduced as Fed officials have a more pessimistic economic outlook.
What are your thoughts on the ECB actions? Please share below!
Article By: Dalton Brewster