ECB Signals Early End to Bond Purchase Scheme
The European Central Bank (ECB) has announced its decision to leave interest rates unchanged, as widely expected. In addition to this, the ECB has signaled an early end to its last remaining bond purchase scheme. This move marks the conclusion of a decade-long experiment in absorbing debt across the 20-nation euro zone.
Shift in Policy Debate
Earlier this year, the ECB raised interest rates to a record high. However, due to unexpectedly benign inflation data over the past few months, further policy tightening has been ruled out. The focus has now shifted to how quickly the ECB will reverse its course. While market expectations indicate potential rate cuts, the ECB has maintained its guidance for steady rates ahead.
Market Expectations vs ECB’s Stance
Despite efforts by conservative policymakers to push back against rate cut expectations, markets anticipate two cuts by April and a total of 155 basis points of easing in 2024. The ECB’s statement, however, did not hint at any policy easing and emphasized that the current interest rates will contribute significantly to achieving the inflation goal.
ECB President’s News Conference
All eyes are now on ECB President Christine Lagarde’s upcoming news conference. Analysts predict that Lagarde will try to temper rate cut expectations but may not repeat her previous guidance of several quarters of steady rates.
Conclusion of Bond-Buying Scheme
The ECB has announced the end of its 1.7 trillion euro Pandemic Emergency Purchase Programme (PEPP). The tapering of reinvestments from mid-2024 will mark the conclusion of this bond-buying scheme. Full reinvestment under the PEPP will cease on June 30, and the portfolio will gradually decrease by 7.5 billion euros per month until the end of the year.
Reasoning Behind the Decision
The ECB’s decision to end the PEPP earlier than planned is based on the belief that the program has served its purpose. Policymakers argue that there is no economic logic in extending it beyond its original end date. However, concerns regarding the stability of markets, particularly for heavily indebted nations, may have contributed to the ECB’s hesitation in fully winding down the program.
Future of Bond-Buying Programs
With the conclusion of the PEPP, the ECB will rely on the untested Transmission Protection Instrument (TPI), a bond-buying program with stricter deployment criteria. This move leaves the ECB with a potentially powerful tool for stabilizing markets should the need arise.
Sources:
– [Fox Business](https://www.foxbusiness.com/markets/ecb-leaves-interest-rates-unchanged-bond-purchases-coronavirus)