The European Central Bank has said it will set out plans to end its €2tn economic stimulus programme next month, sending the euro near its highest levels in more than two years as investors bet Mario Draghi is preparing to end seven years of crisis-era firefighting.
Amid rising confidence in the underlying strength of the eurozone’s recovery, Mr Draghi said the bank was likely to take the “bulk of decisions” on how to wind down its €60bn-a-month bond-buying programme at its next meeting in October.
The euro spiked 1 per cent to above $1.20 on Thursday after the ECB chief said policymakers had a “very, very preliminary discussion” about how to phase out the quantitative easing programme at its governing council meeting.
The ECB first began purchasing eurozone sovereign bonds at the outset of the crisis in 2010, initially to shore up confidence among Greek debt holders, but then in an unprecedented eurozone-wide bond-buying programme in March 2015 aimed at staving off deflation and reinvigorating the bloc’s economy.
Some economists have worried that the rising euro could stifle the eurozone’s strengthening economic growth by making exports more expensive. Mr Draghi acknowledged that the currency’s recent volatility “represents a source of uncertainty” and threatened to cut short the region’s export boom.
But if Mr Draghi’s remarks were an effort to talk the euro away from record levels, investors were not listening. At the end of the European trading day, the euro held above $1.20 and was near an eight-year high against the British pound, at €0.92.
The governing council kept the bank’s main refinancing rate at zero. It also left its deposit rate at minus 0.4 per cent, in effect charging a levy on lenders’ deposits parked at the region’s central banks.
The ECB is widely expected to start unwinding QE in 2018, spurred by improvements in the eurozone economy and amid fears over shortages of eligible bonds to purchase. How suddenly the end comes has been a preoccupation for the bank and investors in euro assets, who threw a mini “taper tantrum” earlier this year after Mr Draghi declared victory in his fight against deflation.
“The bank will be forced next year to scale down purchases,” said Jörg Krämer, an economist at Commerzbank. “However, if the euro made further gains, the tapering process could be slowed down.”
Mr Draghi said policymakers discussed the trade-offs between winding the programme down qucikly or a slower end that would gradually taper bond purchases over several months.
The governing council did not discuss expanding the types of assets it buys, Mr Draghi said.
He hinted markets were right to bet against the ECB increasing interest rates before 2019, saying repeatedly that low interest rates would remain in place “well past the horizon” of QE.
The stronger euro is complicating the ECB’s exit from its crisis-era monetary policies, reducing prices of imports and putting the region’s exporters at risk of falling sales. Economists have struggled to explain why inflation has remained below the ECB’s target of just under 2 per cent despite the broadening recovery, and some doves are reluctant to end economic stimulus before inflation returns.
The central bank was forced on Thursday to lower its projections for inflation in 2018 and 2019 on the back of the single currency’s rise. The ECB now expects inflation of 1.5 per cent this year, 1.2 per cent in 2018 and 1.5 per cent in 2019.
However, Mr Draghi said he was confident that inflation would hit its goal in 2020 — a year after he is expected to step down as ECB president. In June, inflation was expected to hit 1.5 per cent this year, 1.3 per cent in 2018 and 1.6 per cent the following year.
Mr Draghi said the euro’s recent appreciation “requires monitoring”. He said “a broad consensus” among the 25-strong membership of the governing council agreed the currency’s volatility had become problematic, compared with just a few members around the time of the last meeting in July.
The QE programme is widely credited with reviving eurozone growth and blunting the threat of deflation. A new estimate of euro area growth published by the EU statistics agency on Thursday showed that the region’s economy expanded by 2.3 per cent in the year to June — a higher figure than originally thought.
The ECB revised up its growth forecasts, predicting an impressive 2.2 per cent this year, 1.8 per cent in 2018 and 1.7 per cent in 2019. In June, it expected growth of 1.9 per cent this year, 1.8 per cent in 2018 and 1.7 per cent in 2019.
Additional reporting by Roger Blitz
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