ECB decides to buy fewer bonds, but do it for longer

Much of the EU media report that following the ECB Governing Council meeting on 26 October, the ECB unveiled its monetary policy for the future, saying that it would continue buying bonds once the existing programme ends, but would halve the pace of purchases each month. This decision is triggering many comments, especially in Germany, specifies Le Figaro.

Various media outlets, including Público, Le Figaro, The Cyprus Mail, Hospodářské noviny and Právo, report that ECB President Mario Draghi announced that the assets purchase programme will be prolonged for 9 months after December 2017, but the amount of monthly purchases will decrease from €60 billion to €30 billion. The purchase of debt by the ECB follows some rules like the 33% limit of debt that can be purchased to a country and the purchase must be made according to the participation of each country to the ECB’s capital, Público underlines.

Äripäev adds that if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress, the council stands ready to increase the programme in terms of size and/or duration. Le Figaro further notes that according to what was decided at the meeting, the ECB’s reference rates will remain unchanged, in particular the negative rate on deposit facilities.

The ECB also explained that “the Eurosystem will continue reinvesting maturing debt, well beyond the net purchasing programme, for an undefined period.” Finally, the refinancing of banks by the ECB, at a fixed rate and for unlimited quantities, will be maintained “as long as necessary.”

While De Standaard’s Nico Tanghe notes that the ECB board’s decision was not taken unanimously, The Daily Telegraph devotes its front-page to German and French stock markets, which both surged to an all-time high following the announcement that it would extend its quantitative easing programme until September 2018.

Mario Draghi, the ECB’s president, succeeded in soothing markets with “dovish” guidance and a pledge to extend or increase QE in the future if need be. But it is the decision to halve the volume of bonds to be purchased by the ECB that prompts most of comments.

De Tijd‘s Stefaan Michielsen thus writes that the ECB is walking on a tightrope after the announcement. In normal time, the ECB’s decision would have led to market unrest, writes Guillaume Maujean in Les Echos. However, markets welcomed the announcement, he says, and rates dropped across the euro area.

According to him, this is the case because ECB President Mario Draghi managed to convey two messages in his announcement. First, the policy is changing because the ECB can afford to do so: indeed, the euro area economy should grow by more than 2% this year, while the unemployment rate is the lowest it has been in eight years, and confidence is high. Second, the ECB is prepared to revert to a more accommodating policy if necessary, and interest rates will remain low for a long time.

Yet, France 2’s François Lenglet comments that this change of policy drew a mixed response from EU member states. For northern countries, such as Germany and Austria, this change has come late: indeed, these countries have strong growth and low unemployment levels. On the contrary, for southern countries, such as Italy and Greece, the change has come too early, as these countries are experiencing a fragile economic recovery and unemployment levels are still high.

Het Financieele Dagblad adds that it has become clear in the past three years of the purchasing programme that southern European countries are more in favour of the programme than northern Europe. The programme has major risks because the low interest rates prompt investors to search for alternative ways to make money, for example by lending money to instable companies.

The Dutch daily continues noting that the bad news is that a majority of the ECB board does not want to commit to a complete end of the programme because inflation is still too low. As expected, German observers delivered the more sceptical comments.

In Süddeutsche Zeitung, Marc Beise indeed criticises the ECB’s announcement to halve bond purchases as being “too little, too late.” In an effort to help the economy and indebted European states, the ECB puts savers at risk and removes the incentive for these states to implement reforms. Mr Beise warns that many years will go by before these risks are brought back down to a normal level. More and swifter action may have prevented this problem.

According to FAZ’s Holger Steltzner, Mario Draghi hesitates to change the ECB policy because Italy benefits from the current state. Meanwhile, savers in Europe remain at risk of losing their pension plans. he also states. Mr Draghi is further criticised for not reaching the ECB’s inflation rate goal despite its expansive monetary policy since the financial crisis. Mr Steltzner concludes that change will not occur as long as Mr Draghi remains in office.

But commentators in Handelsblatt seem less negative. According to them, President Draghi “only wants to do his job.” Writing in Die Welt, Anja Ettel critically notes that one has to look to the US to see how an exit to an expansive monetary policy is performed. In her opinion, the comparison with the Fed shows how far away the ECB has moved from its original role model Bundesbank.

Commenting in the Financial Times, Thomas Hale writes that while yesterday’s reaction in markets reflects a communication job well done by the ECB, the slow pace at which stimulus is being scaled back points to a wider unease among central banks that have committed to unwinding post-crisis stimulus but are doing so gingerly.

The extension of the bond-buying programme allowed the ECB to offer more clarity over interest rates, which will remain at record-low levels. If market analysts anticipate that the decisions announced by the ECB will give support to the peripheral countries, they are divided about the impact in the negotiations between the euro and the dollar, Dinheiro Vivo online reports. Michiel de Bruin, analyst for BMO states that for now these measures will assure support in the debt market of weaker European countries but in general “it is probable that it has a harsh impact in the European debt markets”, anticipating the raise of interest rates.