ECB ends its QE program, Draghi maintains a cautious tone

Euro stays muted to ECB's statement

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The European central bank held its monetary policy meeting last week. As widely expected, the central bank announced an end to its QE program but said that it would keep its re-investment of the asset purchases open ended.

The central bank formally announced an end to its 2.6 trillion euro quantitative easing program at its meeting on Thursday last week.

The ECB’s statement read:

“The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary,”

The announcement to end the QE program comes at a time when inflation in the Eurozone has been weakening, but staying near the central bank’s 2.0% inflation target rate. The central bank was seen performing a balancing act as it guided the markets through its tapering program. The ECB, however, maintained that it would support the economy if conditions deteriorated.

The announcement puts an end to a four-year program that started after the growth crisis hit the Eurozone. It helped to support inflation and spur growth, and following this, the ECB said that there was no further benefit on keeping its QE program open.

The central bank did not make any changes to the interest rates with all the main interest and refinancing rates staying close to zero.

There has been speculation that the ECB would start hiking interest rates by the middle of next year. However, this expectation has waned given the recent downtrend in both inflation and the Eurozone’s economic growth.

“The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019,”

the ECB’s statement showed.

Following the release of the ECB’s statement, the president Mario Draghi held a press conference as was the norm. Speaking to reporters, Draghi said that headline inflation is likely to decrease in the coming months.

However, inflation was expected to rise in the medium term.

“Looking ahead, underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion, and rising wage growth,”

Draghi said at the press conference.

The ECB President also said that growth risks were broadly balanced but said that there continued to be a threat due to global trade and protectionist policies.

Draghi also assured that the ECB’s governing council was ready to adjust its monetary policy tools as it deems appropriate to ensure that inflation continues to move towards the 2.0% inflation target.

In a somewhat dovish reference, Draghi said that the Eurozone economy still needed significant monetary policy stimulus to build up the momentum and price pressures further. He said that recent incoming data was weaker than expected and that it reflected soft external demand.

The Eurozone’s growth hit the peak in 2017 but started to slow for the majority of this year.

Growth momentum further slowed in the third quarter with Germany dragging down the Eurozone’s GDP. This comes amid the automobile emission standards. Economists expect this to be temporary and forecast that growth would start to rise again in the coming quarters.

The euro currency did not react much to the ECB’s monetary policy statement or the press conference. The muted reaction was seen as the ECB’s statement was broadly in line with the market estimates and the central bank did not throw any major surprises.

The common currency has settled into a sideways range of 1.1435 – 1.1300 since the middle of November.


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