Eurozone Monetary Policy December 2018

Eurozone

Eurozone: ECB halts bond-buying program in December

December 13, 2018

In a historic, although predictable, monetary policy meeting, the European Central Bank (ECB) confirmed on 13 December that its massive asset-bond buying program is ending this month. The quantitative easing program has seen the ECB accumulate a portfolio of EUR 2.6 trillion in assets over nearly four years to stimulate the Eurozone’s economic recovery. While the end of QE can be viewed as de facto monetary tightening, the Bank reiterated that it would continue to reinvest the principal payments from maturing securities “for an extended period time”, which should keep conditions accommodative. In addition, interest rates are expected to remain at their present record-low levels until at least the end of next summer. Accordingly, the ECB left the refinancing rate at 0.00%, the marginal lending rate at 0.25% and deposit facility rate at minus 0.40%.

The decision comes as policymakers try to strike a delicate balance between stoking growth and taming inflation, while at the same time reducing volatility in financial markets. The Eurozone economy has strengthened notably over the past two years, lessening the need for extraordinary monetary policy measures. In recent months, higher oil prices have caused inflation to rise above the ECB’s target of “below, but close to, 2%”, although underlying price pressures remain soft. Meanwhile, growth dropped to the lowest level in over four years in Q3 as a gloomier global backdrop and sluggish industrial activity hurt dynamics.

Despite the slowdown, the Eurozone recovery is still on track, and in the accompanying press conference ECB President Mario Draghi stressed that the risks surrounding the bloc’s growth outlook are “broadly balanced”, with domestic demand and the accommodative monetary policy stance underpinning momentum. However, Draghi did acknowledge that the balance of risks has moved to the downside since the last meeting due to “uncertainties related to geopolitical factors, the threat of protectionism, vulnerabilities in emerging markets and financial market volatility”.

Looking ahead, the ECB is expected to proceed very slowly with a gradual normalization of monetary policy. Draghi reiterated that interest rates are expected to remain unchanged until the end of summer 2019 or for as long as needed to ensure sustained convergence of inflation towards target. In addition, the Bank stated it would continue to reinvest profits beyond the date of the first rate hike. The ECB also released revised GDP and inflation forecasts at its December meeting, and now sees the economy growing 1.7% (previous: 1.8%) next year and inflation of 1.6% (previous: 1.7%), as well as released 2021 forecasts for the first time.

Eurozone Interest Rate Forecast


The bulk of our panelists see the policy rate being hiked before the end of 2019, with Consensus for the rate to end the year at 0.16%. In 2020, the rate is seen ending the year at 0.62%.


Author: Angela Bouzanis, Senior Economist

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Eurozone Monetary Policy Chart


Euro Monetary Policy November 2018

Note: ECB Refinancing Rate in %.
Source: European Central Bank (ECB).


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