With quantitative easing often described as monetary medicine for the economy, the announcement that QE will end has raised concerns about the health of the eurozone when it is withdrawn.
Indeed, the unconventional monetary policy measures introduced by the ECB in the aftermath of the financial crisis did much to revive an ailing eurozone patient suffering from persistently low inflation and an economic slowdown.
On the inflation front, the most recent (June 2018) ECB macroeconomic projections for the euro area indicate strong confidence in the gradual convergence towards the 2% target. Meanwhile, eurozone GDP increased by 2.5% in 2017 — its fastest growth rate in a decade — and policymakers are confident the economy will continue to expand in 2018.
These robust euro area economic fundamentals inevitably give rise to questions about the risks of withdrawing QE. But the central bank has said the withdrawal of its unprecedented bond buying stimulus programme will happen slowly and cautiously. Rather than cutting off the medicine supply in one go, it intends to drip-feed the economy with reduced doses of the lifeblood it needs.
The ECB said in its June statement that it will continue the QE programme at the same monthly pace until September 2018 after which it will be cut by half to €15 billion until December 2018 at which point it will end.
Furthermore, the accommodative stance will remain in place well after the end of the QE programme. As the central bank said in March 2018, it will continue to “reinvest the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time after the end of its net asset purchases.”
At the same time, interest rates will remain unchanged until at least the summer of 2019, the ECB said in its June announcement. ECB President Mario Draghi looks set to continue with the sequencing strategy — that of implementing rate hikes only after the conclusion of QE.
So the ECB may have mapped out the end of its stimulus programme but it will be a long goodbye to QE. Normalisation of euro area monetary policy will take place at a measured pace as the central bank monitors the eurozone’s economic and financial health.
This cautious approach is in line with the ECB’s stance over recent years.
“Patience, persistence and prudence”, the three Ps articulated by Mario Draghi in recent speeches, have come to define ECB monetary policy in the post-crisis era.
And it seems these three policy pillars will continue to shape and inform the ECB decision-making process as financial markets approach a critical juncture — the shift away from extraordinarily accommodative monetary policy.
With the ECB and other central banks looking to turn off the liquidity taps, the year 2018 could prove a decisive turning point for the global economy. And allowing the eurozone to wean itself off the QE medicine in a controlled and gradual manner will be all-important.