Mario Draghi says investors must wait until October for quantitative easing taper decision as European Central Bank (ECB) holds policy
Mario Draghi today told investors they will have to wait until at least October for a decision on the future of its quantitative easing bond purchases, as the European Central Bank (ECB) left monetary policy unchanged.
Speaking at the ECB’s headquarters in Frankfurt, ECB president Draghi said: “This autumn we will decide on the calibration of our monetary policy instruments beyond the end of the year.”
The European central bankers discussed “various scenarios”, Draghi said, with the length and size of monthly purchases under “very, very preliminary” consideration. He added: “Probably the bulk of these decisions will be made in October.”
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The central bank is currently buying €60bn (£55bn) in bonds each month, mainly issued by Eurozone governments. However, that programme is due to run out in December, with a decision expected imminently on the plan for 2018.
Most economists expect the ECB will begin to taper its asset purchases, by reducing the scale of the bond-buying from December onwards. No movement on interest rates is expected until the asset purchase programme finishes.
The announcement was “broadly as expected”, according to Nandini Ramakrishnan, global market strategist at JP Morgan Asset Management, with an acknowledgement of a stronger economy and a clear signal that a tapering announcement is on the way.
“Inflation is the one thorn in the foot of the European economy” which could affect the decision between now and the October meeting, said Ramakrishnan. However, reduced inflation forecasts allow “the optionality to do what they want at their own pace”, she added.
The ECB is keen to avoid moving too quickly to avoid bond yields rising in a “taper tantrum”, as occurred when the Federal Reserve started winding down its stimulus efforts in 2013. Bond prices (which move inversely to yields) may fall when the ECB demand is removed from the market.
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Meanwhile, the euro rose to just shy of its highest level against the dollar since January 2015 following the press conference, briefly reaching $1.205, after the ECB raised its projections for European GDP growth and only slightly reduced its inflation forecasts.
Draghi said the high euro “represents a source of uncertainty which requires monitoring”. This view was a “broad consensus” among the other bank heads at the meeting, he added.
A more valuable euro should weigh on Eurozone inflation, potentially preventing it reaching its target for annual inflation of near but below two per cent. The ECB expects inflation to only reach 1.5 per cent in 2019, the same as its current level.
Growth will reach 2.2 per cent this year, according to the ECB’s projections, before moderating to 1.8 per cent next year and 1.7 per cent in 2019. That reflected “the recent stronger growth momentum”, Draghi said.
The ECB retained its main interest rate, for main refinancing operations, at zero per cent, while the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.25 per cent and negative 0.4 per cent respectively.
How to understand the European Central Bank’s interest rates
The European Central Bank (ECB) has three rates:
The main refinancing operations: what banks pay to borrow from the ECB
The rate on the marginal lending facility: the rate at which banks lend to each other overnight
The deposit facility: the rate banks receive to leave money with the ECB overnight
The ECB has kept interest rates unchanged since March 2016, when all three were cut. They have since stayed at zero per cent, 0.25 cent and minus 0.40 per cent respectively.
If a rate is negative the bank will pay the ECB (rather than receiving money in interest). Negative rates are intended to encourage banks to lend money to businesses rather than holding it themselves or, as is the case with the deposit facility rate, depositing it with the ECB overnight.