Eurozone: ECB halves monthly QE purchases but extends program to September
October 26, 2017
After weeks of speculation by market analysts, the European Central Bank (ECB) finally announced a reduction to its bond-buying program at its 26 October meeting, as growing confidence in the Eurozone’s economic recovery has eroded the need for the Bank’s ultra-accommodative monetary stance. The ECB announced that it will reduce the monthly pace of asset purchases from EUR 60 billion currently to EUR 30 billion, starting in January 2018. Overall, however, the Bank’s stance remains very accommodative, and the ECB extended the asset-buying program until at least September 2018, stating that the program could go longer if deemed necessary. As widely expected, the Bank made no changes to its interest rates and decided to hold the refinancing rate, the marginal lending rate and the deposit facility rate steady at 0.00%, 0.25% and minus 0.40%, respectively.
A broadening recovery in the Euro area, combined with a scarcity of assets, drove the ECB’s decision. The common-currency bloc grew a robust 0.7% quarter-on-quarter in Q2, and incoming data for Q3 points to another strong period of growth. A healthier labor market, high confidence and solid global demand are behind the economy’s stellar momentum. The Eurozone is on pace to grow 2.1% in 2017, meaning that the ECB’s ultra-accommodative stance is no longer necessary.
Despite the stronger activity, inflation is still under the ECB’s target of “below, but close to, 2.0%”, which warrants keeping financial conditions accommodative and justifies the Bank’s extension of the QE program. In the accompanying press conference, ECB President Mario Draghi emphasized that, “An ample degree of monetary stimulus remains necessary for underlying inflation pressures to continue to build up and support headline inflation developments over the medium term.”