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ECB ends long-running QE stimulus programme
THE European Central Bank (ECB) took the watershed decision to halt its 2.6 trillion-euro (S$4.1 trillion) bond-buying programme, capping massive monetary support even though the eurozone economy looks vulnerable again.
Policymakers led by president Mario Draghi confirmed that they will stop net purchases this month, ending almost four years of quantitative easing (QE). Signalling it's still a way from tightening policy, the Governing Council changed its guidance to say maturing debt will be reinvested "for an extended period of time past the date when it starts raising the key ECB interest rates". Rates will remain at record lows "at least through the summer" of 2019.
At a news conference after the announcement, Mr Draghi maintained the bank's long-standing assessment that risks to growth remain "broadly balanced", but also acknowledged that downside elements were becoming more prominent. Growth in the 19-member eurozone has slowed more than expected in recent quarters. "The risks surrounding the euro area growth outlook can still be assessed as broadly balanced," Mr Draghi said.
However, the balance was moving to the downside owing to uncertainties "related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility", he added.
With France and Italy in political turmoil, a global trade war looming large, and Germany struggling to rebound after a dismal third quarter, markets have long seen the ECB's growth assessment as overly optimistic. But a formal downward shift in the balance of risk assessment would have led investors to expect a policy response.
Mr Draghi cut growth forecasts and tweaked inflation projections. For 2019, the ECB sees the eurozone economy expanding by 1.7 per cent, against a previous projection of 1.8 per cent and analyst expectations for 1.6 per cent. It then sees growth at 1.7 per cent in 2020 while its initial projection for 2021 is for a 1.5 per cent expansion.
For inflation, the ECB raised slightly its 2018 forecast to 1.8 per cent but cut its 2019 forecast to 1.6 per cent from 1.7 per cent. It sees 2021 inflation at 1.8 per cent.
QE started in the euro area in March 2015 in the hope that it would stave off the threat of deflation by pushing down market interest rates and encouraging risk-taking. It was launched months after the US Federal Reserve stopped its own programme and only after battles within the Governing Council, which had already cut interest rates below zero, with German policymakers leading the opposition.
Initially, it was supposed to run for less than two years, yet multiple extensions along with other monetary measures such as long-term bank loans bloated the ECB's balance sheet to 4.7 trillion euros. That's equivalent to more than 40 per cent of economic output, compared with 20 per cent at the Fed.
Whether it worked is debatable. According to the ECB's latest estimate, the purchases will have added a cumulative 1.9 percentage points each to growth and inflation from 2016 to 2020. Euro-area growth also outpaced the US in 2016 and 2017.
Yet, some economists including CME Group's Erik Norland say the ultimate benefit for growth was a lot closer to zero, as there was no obvious impact when the pace of bond-buying started to slow. Critics in Germany blame QE for preventing governments such as Italy's from taking much-needed steps to reform their economies.
The announcement, confirming a plan first agreed in June, came after a spate of central-bank decisions in Europe. The Swiss and Norwegian central banks left policy unchanged, though the Swiss National Bank cut its inflation outlook.
Turkey and Ukraine also kept rates on hold. The Fed is set to hike rates next week for the fourth time this year.
Recent euro-area economic data highlight how the summer slowdown - including contractions in Germany and Italy - is proving tough to overcome. Purchasing managers are even less optimistic about growth than they were before the start of QE. REUTERS, BLOOMBERG