ECB holds steady as markets wait for exit hints

FRANKFURT AM MAIN: European Central Bank policymakers held key interest rates and mass bond-buying unchanged on Thursday (Jul 20), sending a calming message to financial markets looking for hints the bank’s easy money policy will soon end.

Attention will now turn to central bank chief Mario Draghi’s press conference at 1230 GMT, when he is expected to reassure investors jittery about a possible end to bond-buying.

Just three monetary policy meetings remain before December, when the bank’s €60-billion-per-month ($US69 billion) purchases of government and corporate bonds are presently set to expire.

Most observers expect the central bank to soon announce a path out of bond-buying that will see it “taper” or wind down the “quantitative easing” (QE) programme step-by-step next year.

That will make a press conference on Thursday “a balancing act that requires all of Draghi’s verbal acrobatic skills,” analyst Carsten Brzeski of ING Diba bank said ahead of Thursday’s announcement.

The ECB must prime the markets for an end to QE, but also be careful not to sow panic.

Along with historic low interest rates and cheap loans to banks, the ECB’s bond-buying is designed to pump cash into the economy, powering growth and pushing up prices.

While inflation is still sluggish, economic growth in the 19-nation eurozone has picked up strongly enough to dispel the fears of deflation that had prompted policymakers to launch the scheme.

And the ECB could soon reach technical limits to its bond buying that will make the already controversial programme even more difficult to continue much beyond the end of the year.


Such signs mean investors are on high alert for signals from the central bank, sensitive to even the tiniest changes in governors’ carefully-weighed statements on “forward guidance”.

At a meeting in June, policymakers chose to remove a suggestion that interest rates could be lowered still further if necessary from their regular statement.

That was seen by many as the first hint that the ECB would begin adjusting its policy as economic growth gathers pace.

Speculation was ratcheted up yet further when Draghi told a central banking conference late last month that “as the economy continues to recover … the central bank can accompany the recovery by adjusting the parameters of its policy instruments”.

This was interpreted by markets as a gesture towards “tapering”, or winding down bond-buying. And the remarks pushed up bond yields – the returns investors can expect from buying government debt – and the value of the euro.

If those trends continue, they could sap growth in the single currency area. So, the ECB hastily sought to clarify Draghi’s words.

Nevertheless, the president’s comments “opened the back door to announce a reduction in monthly bond purchases from next year in September or October,” commented analyst Kristian Toedtmann of Deka bank.

ECB staff are studying different ways the bank could approach tapering, Bloomberg News reported Tuesday citing anonymous sources, although policymakers have yet to set a date for any announcement.

Governors are likely to move later this year “even if the little remaining inflation data to be published before then does not clearly point upwards,” Toedtmann added.

Justifying an end to QE on inflation data alone will be difficult, as eurozone prices grew by 1.3 per cent in June – well short of the ECB target of just below 2.0 per cent.

Central bank forecasts include inflation of 1.5 per cent this year and just 1.3 per cent in 2018.


Any observers looking for interest rates to rise from their historic lows likely have a long wait ahead, analysts agree.

The ECB has for many months stated that rates will only start to rise “well after the horizon of net asset purchases” has come to an end.

The bond-buying programme itself might not be completely wound down until far into 2018, while low inflation expectations stretching into 2019 would make it difficult to justify higher rates.

Furthermore, “well-anchored expectations about future interest rates will help the ECB limit unwanted large market reactions to the impending end of QE,” adding to the pressure to hold rates down, Deka’s Toedtmann noted.

Leave a Reply

Your email address will not be published.

two × one =