Wary ECB to cut bond buys, but over time

European Central Bank President Mario Draghi said that since core inflation in the euro zone has not shown an uptick, an ample degree of monetary stimulus remains necessary. The bank thus twinned cutting the bond buys with a nine-month extension of t
European Central Bank President Mario Draghi said that since core inflation in the euro zone has not shown an uptick, an ample degree of monetary stimulus remains necessary. The bank thus twinned cutting the bond buys with a nine-month extension of the programme.PHOTO: REUTERS

FRANKFURT • The European Central Bank (ECB) yesterday took its biggest step yet in weaning the euro zone economy off years of stimulus, but said the economic outlook was still dependent on its lavish monthly purchases of euro zone bonds.

It said it will slash its bond buys in half to €30 billion (S$48.3 billion) a month from January.

But bothered by stubbornly low inflation, the ECB twinned the cut with a nine-month extension of the programme, opting to buy fewer bonds but for a longer period, to reassure investors it will provide accommodation for a long time.

Indeed, the ECB even maintained its option to increase or extend the bond-buying programme, an apparent victory for policy doves who argued that they should not commit to ending the buys since possible euro gains could exacerbate weak inflation.

ECB president Mario Draghi called the changes a "recalibration" and indicated that the bank's work in boosting inflation and ensuring growth was not yet done.

Euro zone bond yields fell after the announcement on what traders said was relief over the programme's continuation, albeit it with less buying.

The euro was down by 0.53 per cent to US$1.1749, though off the session's low.

There is a relief in markets that the ECB extended the programme by nine months and that the (monthly) pace still remains quite high," ING strategist Martin van Vliet said.

At a news conference, Mr Draghi said that the euro zone economic outlook had improved, but that core inflation had not yet shown any convincing signs of an upward trend - the goal of much of the stimulus.

"Domestic price pressures are still muted overall and the economic outlook and the path of inflation remain conditional on continued support from monetary policy," he said. "Therefore, an ample degree of monetary stimulus remains necessary."

Designed nearly three years ago to fight off the threat of deflation, the bond purchase scheme has cut funding costs, revived borrowing and lifted growth, even if it ultimately failed to raise inflation back to the ECB's target of almost 2 per cent.

Interest rates were left unchanged as expected and the ECB reaffirmed its guidance to keep them unchanged until well after its bond buys end.

Mr Draghi told the news conference that there had been some difference of views among the rate-setters, but that decisions were taken in a positive attitude.

Hawks such as Germany and the Netherlands have wanted a commitment to end bond buys, arguing that growth is now above trend and that more purchases do next to nothing for inflation.

Doves on the bloc's periphery, however, warn that a rapid exit could tighten financial conditions, undoing years of work.

REUTERS

A version of this article appeared in the print edition of The Straits Times on October 27, 2017, with the headline 'Wary ECB to cut bond buys, but over time'. Print Edition | Subscribe