After four years and a €2.6tn bond-buying binge, the European Central Bank’s experiment in seeking to salvage the Eurozone economy by swelling its balance sheet is about to end.
Few policies have been so contentious during Mario Draghi’s management of the ECB as “quantitative easing” – its vast programme of bond purchases aimed at overcoming economic stagnation.
A parallel of the unorthodox moves by other leading central banks such as the US Federal Reserve and the Bank of England, it was fiercely contested within the Eurozone, where more prudent northern member states did not want to take on the political risks identified with weaker southern counterparts.
Mr Draghi overcame the protests of ECB hawks to impose QE, and last year the Eurozone grew at its most rapid pace since the crisis. With growth in the Eurozone having slowed, and serious risks emanating from within and outside the region, Mr Draghi wants to cement his dovish message that the ECB will continue to reinforce the economy by alternative measures and that monetary policy is still years from normalcy.
But what the bank does with the €2.6tn of bonds acquired under QE is another issue and produces a practical difference to the degree of monetary policy tightening, irrespective of when the ECB adjusts interest rates.
Another factor will be how the bank handles any shift in interest rates – which have been at record lows since the spring of 2016. Its main interest rate is zero while its negative deposit rate means it still costs Eurozone banks 0.4 percent to hold their money within the ECB’s system of national central banks — an enduring manifestation of the topsy-turvy post-crisis world. So far the ECB has declared it expects to keep interest rates on hold “at least through the summer of 2019”. Any deal over new communication is not confirmed.
But, with the data indicating that the region’s growth is waning, economists expect the bank to declare the risks to the economy are now to the downside. Markets have already started to bet that rates will not rise until 2020 and that the reinvestments stemming from QE will continue for two to three years.