Frankfurt, Germany – The European Central Bank is expected to reinstate its stimulus efforts on Thursday as it cautiously mines off its extraordinary support for the economy left over from the Great Recession and the eurozone debt crisis.
The Bank's 25-member Board will reduce its monthly bond purchase from € 30 billion per month to € 15 billion per month to end purchases at the end of the year.
The ECB will announce this step in a statement after President Mario Draghi and other senior officials announced the forthcoming steps of the bank at its last meeting on 14 June. The ECB will also underline its intention not to raise its interest rates until at least mid-2019.
Reinhard Cluse, Chief Economist at UBS, said that after the June meeting, the ECB was "essentially on autopilot". Cluse said the ECB could phase out bond purchases and then set the exact date for the first rate hike next summer or fall.
The only way out of the ECB exit plan is a sudden downturn or a sudden crisis. In this case, the purchases could be extended and any interest rate increases postponed.
Right now, that seems unlikely. Europe's economic recovery has slowed since the end of last year, but remains robust despite concerns over trade disputes, Britain's impending exit from the European Union, and the spending plans of the Italian populist government.
The economy grew by 0.3 percent quarterly in the second quarter. At 2 percent, inflation roughly matches the ECB's target of below, but close to 2 percent. However, when volatile goods such as fuel and food are excluded, inflation is weak at just 1 percent.
The ECB has managed to outline a withdrawal of incentives that are so slow and predictable that they would not have shaken the markets, said Carsten Brzeski, chief economist at ING Germany. "It sounds boring, but it's also a success story," because the ECB "managed to really control market expectations," he said.
The stimulus exit is a global trend among the leading monetary authorities in the wealthy world – the ECB, the Federal Reserve, the Bank of England and the Bank of Japan. They eased monetary policy – they lowered interest rates and pumped new money into the economy – to shore up the economy after the global financial crisis that intensified 10 years ago with the bankruptcy of the US investment bank Lehman Brothers. A debt crisis in Greece, Ireland, Portugal, Spain, Cyprus and Italy has continued to hold back the 19 countries that use the euro as their currency.
The withdrawal of stimuli should have far-reaching effects. Low interest rates and bond purchases had raised prices for assets such as stocks and bonds. Rising interest rates and more restrictive monetary policies may make conservative positions such as savings accounts, money market funds and certificates of deposit more attractive to investors than riskier assets such as equities. For this reason, the ECB is cautious to bring interest rates to a more normal level.
The purchase of government and corporate bonds by the ECB is a way to push newly created money into the banking system and hopefully into the economy. The aim was to raise inflation from dangerously low levels to near zero and help banks to provide more corporate credit to boost growth.
Low interest rate benchmarks had the same goal. The ECB's lending rate for banks is at a record low of zero, compared to the Fed rate in a range of 1.75 to 2.0 per cent. The Fed has already raised interest rates several times, while the ECB has slowed down stimulus much more slowly as economic recovery in Europe has been slower.
As the bank takes the stimulus, many of the recent media reports on the bank are not focusing on monetary policy, but on European leaders following Draghi when his term ends in October 2019. This has reported the Handelsblatt German Chancellor Angela Merkel wants to focus on a German EU Commission chief, instead of seeking the top posts at the ECB for Jens Weidmann, the head of the German central bank. Other names often mentioned in speculation include French central bank chief Francois Villeroy de Galhau, Finnish central bank chief Olli Rehn, former Finnish central banker Erkki Liikanen and Irish central bank chief Philip Lane.