ECB: Too early to turn off the QE tap?


Last Thursday saw ECB’s last policy meeting for 2018 with confirmation of an end to the €2.6 trillion QE programme. Whilst not a surprise, the bullish headline nature of the announcement was largely ignored by the market. Mario Draghi’s outlook for growth was noticeably more cautious, describing the risks as “still broadly balanced” but “moving to the downside” – the key language on rates guidance: interest rates are expected to “remain at their present levels at least through the summer of 2019”.

 

Furthermore, confirmation that the ECB plans to reinvest maturing securities for “an extended period of time” demonstrates their commitment to keep markets rates low amid signs of slowing economic growth  highlighted by the posterchild of EU, Germany having a bad third quarter in 2018, shrinking by 0.2%

 

In basic terms, to balance out the risks, Draghi is offering concessions in order to transition away from printing money: postponing normalisation of super-low interest rates until next summer and reinvesting in maturing assets.

 

Figure 1

 

 

It begs the question “Why turn off the QE tap now?”

 

With some suggesting the time for fire-fighting is over which QE had been brought to an end, interest-rate guidance is now enough of an active policy tool, talking the yield curve up or down to fine-tune monetary conditions in the euro area.

 

And undoubtedly, the eurozone is in better shape than it was when the central bank began the quantitative-easing program early in 2015 as some pundits were predicting the Euro’s demise. This echoes Draghi’s continued rhetoric that QE has done the job of stabilising the eurozone economy during the crisis; achieving the primary goal of raising headline inflation rates in the eurozone not to mention achieving 2.4% output growth in 2017.

 

However, the ECB has a record of optimistic forecasts and one has to wonder whether they are to make another. Growth has drastically slowed, notably in Germany & Italy and risks have grown – the rise in US-EU trade tensions (continued threat that US president Trump will slap a 20-25% tariff on European cars), France’s yellow vest led instability leading President Macron into a fiscal U-turn, political instability tumult in Italy’s politics (despite the EU’s small win on the agreed new 2.04% budget framework) and not to mention the continuing chaos surrounding Britain’s plans to decouple from the European Union.

 

Hence, the reality is that while the ECB feels the economy is strong enough for it to withdraw its emergency medicine, the chances are that it is still a long way from being able to begin raising interest rates in the way that the Fed have been which may keep the EUR supressed.

 

With the EUR currency marking its 20th birthday in January, Draghi may be recalling his infamous 2012 comments – “ECB is ready to do whatever it takes to preserve the Euro”…….despite being faced with an economy that may be slowing.

 

 

Author: James Sebastian

 

 



 

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