Update on European Central Bank Quantitative Easing monetary policy

The 26th of October 2017 the European Central Bank (ECB) decided to extend its Quantitative Easing (QE) program until at least September 2018, but reduced its monthly QE purchases from EUR 60bn to EUR 30bn starting in January 2018. Nonetheless, on top of the EUR 30bn the ECB will continue reinvesting the estimated EUR 15bn principal payments from maturing securities. The euro fell after the announcement, trading down 0.5% at $1.1758 at 2:11 p.m. Frankfurt time, and European government bonds’ prices increased. The main refinancing rate will be kept at 0%, the deposit rate at -0.4% and the marginal rate at 0.25%.

ECB president Mario Draghi made clear that the ECB will end the QE program gradually, possibly until Q1 2019, which means that rates may not increase until the end of Q2 2019. The ECB expects the key interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.

QE program was introduced as an emergency measure during the global financial crisis to directly inject liquidity into the financial system and to incentivize lending. The goal of such loose monetary policy is to revive euro-area inflation, create an investment-friendly environment for enterprises and to benefit consumers with more secure jobs and lower governments’ interest burden. Previously, the ECB president Mario Draghi defended QE saying “A large body of empirical research has substantiated the success of these policies in supporting the economy and inflation, both in the euro area and in the United States”. Even though the ongoing economic expansion gives assurance that inflation will eventually reach its target, monetary accommodation is still needed for the underlying inflation to increase. In September 2017, the consumer prices in the Eurozone increased by 1.5% year-on-year. However, the longer the QE program is extended, the more costly and less effective it becomes.

References

ECB Press release, Monetary policy decision, 26 October 2017

ECB Economic Bulletin, Issue 6 / 2017