The European Central Bank (ECB) has announced its intention to phase out its quantitative easing (QE) program by the close of 2018. This decision marks a significant step in the Eurozone’s journey towards normalizing monetary policy following years of unprecedented stimulus measures.
Key Decisions and Rationale
At its latest policy meeting, the ECB Governing Council decided to maintain its key interest rates at their present levels. The main refinancing operations rate will remain at 0.00%, the marginal lending facility rate at 0.25%, and the deposit facility rate at -0.40%. The ECB anticipates that these rates will remain unchanged at least through the summer of 2019, and for as long as necessary to ensure the continued convergence of inflation to levels that are below, but close to, 2% over the medium term.
The central bank plans to continue its asset purchases under the asset purchase programme (APP) at a monthly pace of €30 billion until the end of September 2018. Subject to incoming data confirming the Governing Council’s medium-term inflation outlook, the ECB expects to reduce the monthly pace of net asset purchases to €15 billion from October until the end of December 2018. Net purchases are then expected to cease.
Economic Outlook
The ECB’s decision is underpinned by its assessment of the Eurozone’s economic outlook. While acknowledging some recent moderation in growth momentum, the ECB believes that the underlying strength of the Eurozone economy remains robust. The central bank expects the economy to continue expanding, albeit at a more moderate pace, supported by domestic demand and favorable financing conditions.
Inflation Expectations
A crucial factor influencing the ECB’s policy stance is its outlook for inflation. The ECB aims to maintain inflation rates below, but close to, 2% over the medium term. While headline inflation has been volatile, the ECB expects it to gradually converge towards its target as the effects of past shocks dissipate and as wage growth picks up.
Market Reaction
The ECB’s announcement has been closely watched by financial markets. The euro initially weakened against the US dollar following the announcement, as some investors had anticipated a more hawkish signal from the central bank. However, the overall market reaction has been relatively muted, reflecting the fact that the ECB’s decision was largely in line with market expectations.
Looking Ahead
The ECB’s decision to end QE marks a significant turning point for the Eurozone economy. While the central bank remains cautious about the outlook, it is clear that it believes the Eurozone is now strong enough to stand on its own feet without the need for further monetary stimulus. The ECB will continue to monitor economic and financial developments closely and stands ready to adjust its policy stance if necessary.
