European Central Bank Plays Three-Card Monte on Quantitative Easing

It’s time for another taper-tantrum. Or is it? The European Central Bank (ECB) pledged on Thursday to cut its large program of bond buying. On the surface that sounds like the beginning of the end of quantitative easing. The problem with thinking this is the end of the endless quantitative easing is that Mario Draghi also said that the bond-buying program would be extended much further than expected. He has pledged to keep interest rates at quite low levels for longer. In some ways, the central bank’s moves are going to feel like a game of three-card monte.

The ECB also left its key interest rates unchanged at its October meeting. The interest rates on the main refinancing operations, the marginal lending facility and the deposit facility were left at 0.00%, 0.25% and −0.40% respectively.

As far as how low for long, Draghi and the governing council of the ECB continue to expect the key ECB interest rates to remain at their present levels for an extended period — and well past the horizon of the net asset purchases. That means well over a year longer, if you read into the terms.

The eurozone may be on a path toward higher interest rates, and, similar to the United States a year ago, the overhang of the economic crisis has continued to fade away. Some economists and investors are going to take Draghi’s lower bond buying as an acknowledgment that growth is returning and looks like it will remain. Other economists and investors are going to focus on the longer period of low rates and bond buying.

Draghi has maintained his stance that continued economic stimulus is necessary to get inflation closer to a 2% target. Draghi’s view is that domestic prices remain muted, and he communicated that monetary policy will have to have a role in getting inflation up.

As far as the details, Draghi has pledged to lower the current €60 billion per month in bond buying down to €30 billion. That’s about $35 billion in dollar terms. That lower bond buying also will not go into effect until January of 2018, and the time frame was also posed to be “until the end of September 2018, or beyond, if necessary.”

Other forms of quantitative easing will continue with reinvesting beyond the current time. The ECB said that the Eurosystem will reinvest the principal payments from maturing securities for an extended time after the end of its net asset purchases — and for as long as it deems necessary.

While investors have had a core view for years now on European quantitative easing, this is actually the third extension of the bond-buying program. As far as how large this has been in total, the ECB’s total bond buying program will now go to a cumulative €2.5 trillion. This is more than twice as large as what was originally committed by the ECB, and it is almost one-fourth of the region’s total economic output.

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