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End to crisis-fighting era as ECB shuts off stimulus

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A chapter of eurozone history came to a close Thursday when the European Central Bank withdrew a key element of its support for the economy even as clouds gather.

[FRANKFURT] A chapter of eurozone history came to a close Thursday when the European Central Bank withdrew a key element of its support for the economy even as clouds gather.

"Net purchases under the asset purchase programme will end in December 2018," a spokeswoman said after top central bankers met in Frankfurt.

The past three years have seen the ECB ward off the threat of catastrophic deflation - a crippling downward spiral of prices and activity - by buying 2.6 trillion euros (S$4.05 trillion) of government and corporate debt.

Policymakers say the so-called "quantitative easing" (QE) programme has boosted growth, helped create millions of jobs and set inflation back on the path towards its target of just below 2.0 per cent.

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But it has also politicised the bank like never before, as disciples of fiscal rectitude in Germany and other northern countries claimed the scheme indirectly enabled spendthrift policies in the south.

The ECB "should have ended its quantitative easing (QE) programme and its negative interest rate policy a long time ago," the director of the Flossbach von Storch institute in Cologne, Thomas Mayer, told business daily Handelsblatt.

ING Diba bank economist Carsten Brzeski hailed a "great achievement" from the central bank as markets were largely unperturbed by the move.

"The ECB has managed to shelve the first unconventional crisis tool without distorting markets or the economy," he said.

While net purchases are over, a second ECB policy tool - historically low interest rates - aimed at supporting economic expansion by encouraging credit growth will remain in place.

Such caution is needed as it is far from clear inflation would remain on track without a leg-up from the ECB.

Price growth slowed from 2.2 per cent in October to 2.0 per cent last month in the 19-nation single currency area.

However "core" inflation excluding volatile food and energy prices remains sluggish at around one per cent.

On the one hand, interest rates will hold fast at historic lows "at least through the summer of 2019", the ECB said.

On the other, reinvestments of the proceeds from the bank's massive debt stock will continue "for an extended period of time past the date when it starts raising the key ECB interest rates".

AFP