A euro sign sculpture is seen outside the European Central Bank (ECB) headquarters in Frankfurt, Germany. (Photographer: Hannelore Foerster/Bloomberg)  

Draghi Ends ECB Bond-Buying Era Saying Economy Can Beat Risk

(Bloomberg) -- Mario Draghi said the euro-area economy is strong enough to overcome increased risk, justifying the European Central Bank’s decision to halt bond purchases and close an extraordinary chapter in the decade-long struggle with financial crises and recession.

The euro fell after the central bank also pledged to keep interest rates unchanged at current record lows at least through the summer of 2019, a longer timeframe than investors had priced in. Policy makers will phase out bond purchases by the end of this year in what Draghi described as a unanimous decision.

By pushing ahead with a stimulus exit, officials are betting that the euro-area economy is robust enough to ride out an apparent slowdown amid risks including U.S. trade tariffs and nervousness that Italy’s populist government will spark another financial crisis.

“We’ve taken these decisions knowing that the economy is in a better situation, with an increase in uncertainty,” Draghi said at a briefing in Riga, where the Frankfurt-based ECB held its annual out-of-town meeting. While the recent economic “soft patch” may last longer, that doesn’t change the view of underlying momentum, he said.

The End of an Era

  • Bond buying to continue at 30 billion euros ($35 billion) a month until end of September
  • Purchases to be phased out with 15 billion euros in each of October, November and December
  • Maturing debt to be reinvested for an extended period after end of net asset purchases
  • Interest rates expected to stay at current levels at least through the summer of 2019, or longer if needed for inflation
  • End of net asset purchases remains subject to incoming data

The announcement came only hours after the Federal Reserve raised U.S. interest rates for the second time this year, highlighting how a decade of easy money in Europe and America is gradually coming to an end. Still, the People’s Bank of China opted not to follow the Fed in tightened borrowing costs, and the Bank of Japan is expected to maintain its stimulus when it meets on Friday.

What Our Economists Say

“We remain confident that the erosion of slack and strengthening wage growth will continue to lift underlying cost pressure and inflation.”

-- Jamie Murray and David Powell, Bloomberg Economics. Click for their EURO-AREA INSIGHT

The euro traded 1.2 percent lower at $1.1647 at 5:12 p.m. Frankfurt time. Economists in a Bloomberg survey had expected borrowing costs would rise around the middle of next year. Almost half of them had predicted the announcement on the end of net asset purchases to be put off until July.

ECB Interest Rates
Deposit rateMinus 0.4 percent
Main refinancing rateZero
Marginal lending rate0.25 percent

Draghi kept his options open. He said rates will stay at record lows for “as long as necessary” to keep inflation on a sustained path toward the goal of just under 2 percent over the medium term. The Governing Council didn’t discuss changing borrowing costs and ending asset purchases will be subject to incoming data.

“The rates will be changed depending on what is the state of the convergence process” of inflation, Draghi said. “I hope that in the next year, we will be giving an assessment of convergence that is positive and confident.”

Current risks to the economy “warrant monitoring,” but the president reiterated the view that the softening is partly due to temporary factors, and represents a pullback from the decade-high growth in 2017.

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