Doves pretending to be hawks?
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
The European Central Bank (ECB) president, Mario Draghi, and his colleagues held their first formal talks on Thursday to decide when to end their asset purchasing programme, also known as Quantitative Easing (QE).
The purchase of public and private sector securities (bonds) injects liquidity into the European banking system allowing financial institutions to make more loans and corporations to invest more. This policy tactic, along with zero interest rates, has been designed to promote a higher rate of economic growth within the Euro area.
Last year, on 26 October, the ECB Governing Council decided to reduce the rate of bond buying by half, from €60 billion a month to €30 billion a month. This is a sign of increased confidence that the measures taken to promote economic recovery have taken hold.
Asset Purchase Programme (Monthly Net Purchases)
Source: ECB, 14 June 2018
The ECB confirmed that QE would be extended, albeit at a lower rate until the end of the year, with the first interest rate increase expected to take place in the middle of next year.
Over the years the ECB has expanded its balance sheet to €4.5 trillion. No hints were offered as to when shrinking will take place. In contrast to the US, they are simply advancing to the stage of no longer expanding their balance sheet.
ECB Balance Sheet Valuation
Source: Bloomberg, 14 June 2018
The ECB expects interest rates “to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path”.
One slightly downbeat aspect was that the ECB cut its forecast for eurozone growth in 2018, from 2.4% to 2.1%. Forecasts further out are unchanged; 1.9% in 2019 and 1.7% in 2020. The ECB did, however, revise up its inflation outlook for 2018 and 2019, mainly due to higher oil prices.
The ECB meeting on Thursday gave something for hawkish and dovish investors to think about, with Draghi having something to offer to everyone! Inflation hawks got an end date in sight for QE, while doves will be pleased that the ECB will continue to purchase bonds for longer than previously thought, with interest rates unchanged until summer next year.
The fact that the ECB are waiting until the economy is in a better situation is not unreasonable given the backdrop of political uncertainty.
