ECB holds rates steady – Enters final leg of QE purchases

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The European Central Bank held its monetary policy meeting last week on Thursday. As widely expected, the ECB kept its interest rates unchanged but signaled that the central bank was entering the final leg of its bond purchase program.

The ECB will be purchasing bonds at a size of 15 billion Euro until December before ending its bond purchases entirely by the end of the year. This marks the end of the crisis-era stimulus program which saw the ECB launch a massive bond purchase program amid criticism from some quarters.

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The Eurozone’s economic growth is currently running through a weak patch following a sharp end to growth in December last year.

On Thursday last week, the ECB president Mario Draghi acknowledged that the growth in the Eurozone had weakened. However, he confirmed that the central bank would press ahead with its plans on phasing out the easy monetary policy by the end of this year.

The Eurozone economy had initially outpaced the U.S. economy for two years. However, the economic momentum weakened in the initial months of this year. Growth has remained subdued, data from the recent economic indicators already show.

Ahead of the ECB’s meeting, on Wednesday the forward-looking PMI indicators showed that growth in the Eurozone likely eased to the weakest levels in two years.

Speaking to the reporters during the press conference, Draghi said, “There was acknowledgment of a somewhat weaker momentum.” However, Draghi said that it was unclear on whether the slowdown comes due to one-off factors such as a drop in the German automobile industry. The automobile industry in Germany took a plunge following the new emission standards that are to become active.

“It’s not simple to distinguish what is transitory from what is permanent,” Draghi said. The ECB will be publishing its growth forecasts at the December monetary policy meeting. Market watchers speculate that the ECB is very determined to bring its asset purchase program to an end. Some expect only a strong downturn in the Eurozone’s economy that could put pressure on the ECB to kickstart its bond purchases.

As a result, many expect the current slowdown in the economy to not play a significant role at the December monetary policy meeting.

The central bank also reiterated its case for keeping interest rates steady at -0.4%. Rates will stay at the current levels until next summer. The ECB has been holding this line ever since it announced its plans to cut the QE purchases to 15 billion Euro and the plans to end QE by the end of December.

Last week’s monetary policy meeting was widely expected. Despite the recent slowdown, the central bank maintained its eagerness to end its QE purchases.

There are still some risks to the Eurozone’s economic recovery which have only increased in recent months. Currently, the Italian government is facing off Brussels over its budget plans. Italy is the Eurozone’s third largest economy, and its recent budget showed a higher deficit than the EU’s norms.

Growth is likely to be hit in Italy, but it is also expected to affect neighboring regions such as Spain and even Portugal where government bond yields have been rising sharply.

Draghi, however, brushed aside the concerns and said that the spillover from Italy due to the higher borrowing costs would not affect the yields on the other member states. However, he urged Italy and Brussels to reach an agreement soon. “I’m confident an agreement will be found,” Draghi said at the press conference.

International trade tensions remain which could affect the Eurozone’s export industry. On the other hand, the EU and the UK still have not reached a Brexit deal. Draghi said that the longer it drags on, the possibility of a no Brexit deal remains high.

The Euro was seen broadly mute on the day but closed on a bearish note.

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