Eurozone: ECB announces end of QE
June 14, 2018
The European Central Bank (ECB) announced an upcoming end to its massive quantitative easing (QE) program at its 14 June meeting, signaling the beginning of the end for monetary stimulus in the Eurozone. The Bank will finalize its asset purchases program at the end of December 2018 and halve the pace of purchases from the current EUR 30 billion per month to EUR 15 billion per month in the final quarter of the year. Since the start of the program in 2015, the Bank has accumulated more than EUR 2.0 trillion worth of assets. The move illustrates how far the Eurozone economy has come since the financial crisis and authorities’ growing confidence in its economic trajectory, despite a growth slump at the start of 2018.
On top of the QE announcement, the ECB also offered clearer forward guidance on the path of interest rates going forward. The ECB stated that it “expects the key ECB interest rates to remain at their present levels at least through the summer of 2019” if inflation evolves as expected. Overall, the message was quite cautious and suggests that interest rates will continue to remain extremely accommodative in the short term. Accordingly, the Bank left the main interest rates unchanged and the main refinancing rate remains at 0.00%, and the marginal lending rate and deposit facility rate at 0.25% and minus 0.40%, respectively.
The ECB also revised its growth projections for the Eurozone at the June meeting, trimming its GDP forecast for 2018 to 2.1% (previously: 2.4%). The downgrade reflected the soft first-quarter result, while the Bank left its forecasts for 2019 and 2020 unchanged at 1.9% and 1.7%, respectively. Notably, ECB President Mario Draghi stated in the accompanying press conference that risks to the Eurozone’s outlook remain broadly balanced; however, the downside risk of rising global protectionism has become more prominent recently. Meanwhile, the ECB’s projections for inflation were also revised up chiefly due to higher energy prices. The Bank now projects inflation to average 1.7% in 2018, 2019 and 2020.
All-in-all, the ECB struck a delicate balancing act at the June meeting, revealing the end of QE and at the same time pushing a possible rate hike further in the future. While the end of QE is a de facto tightening of monetary conditions, the prolongment of ultra-low interest rates helped offset the announcement, as the low interest rates will keep monetary conditions highly accommodative. Commenting on the ECB’s decision, analysts from Nomura stated that:
“Although the announcement has emerged one month sooner than we thought, we have long been of the view that the ECB would have to wind down the APP [Asset Purchase Program] this year. On the economic outlook, our growth and inflation projections for 2018 and 2019 are broadly the same as the ECB’s. Consequently, we retain our view that the ECB will start lifting its policy rates in September 2019, which is consistent with the ECB’s new forward guidance.”
Eurozone Interest Rate Forecast
All our analysts expect that the refinancing rate will remain unchanged for the rest of this year at 0.00%. For 2019, our panelists see the policy rate ending the year at 0.30%.