The buying up of government and corporate bonds (quantitative easing) started in 2015 in the eurozone. At that time, inflation was at 0% and economic growth did not deviate much from it. Given that the European Central Bank (ECB) is tasked with ensuring less than 2% inflation annually, the bank deployed heavy guns. In the form of the QE policy.
Almost 3 years later, the situation is completely different. Economic growth is high and inflation, at approximately 1,5%, is light years away from 0%. The danger of deflation therefore appears to have passed. In that light, it is at least remarkable that the ECB is not putting away the big guns or reducing them faster than yesterday during the meeting it was said.
Halve the amount
From January 2018, the ECB will spend only €60 billion per month on government and corporate bonds from the euro zone, instead of €30 billion. The bank will continue to do this until at least September next year. In addition, we must take into account, the ECB emphasizes, that it may take longer, if necessary.
However, experience shows that the condition 'should that be necessary' can be met quite quickly within the ECB. A month with bad inflation figures and the bank could already be bankrupt.
Real ending is months later
Mario Draghi, the president of the ECB, also added that the end of the QE policy will not be an abrupt one. This means that when the ECB stops policy in September, the real stop will only be a few months later. No abrupt end means a slow winding down from the moment the ECB decides to stop. This reduction will then proceed by €5 billion to €10 billion per month.
So it will take at least 12 months to actually stop the QE policy. By comparison, the slow end of QE policy in the United States (US) lasted 10 months. And then there is the fact that the ECB is emphatically keeping the option open to extend and/or expand the QE policy.
Still a broad policy
Monetary policy in the eurozone will remain very loose for the time being. The ECB is far from happy to make this less restrictive. Moreover, the bank can always find a reason to continue with the QE policy for longer between now and the autumn of 2018.
It is still unknown how long interest rates will remain at 0%, and how likely it is that the QE policy will last longer. The ECB meeting allowed us to look to the future. We will discuss how this works and what can be seen there in an interest rate video on Monday.