EU: Central Bank Will Continue Quantitative Easing Next Year

Fri, Dec 9, 2016 - 2:59pm

The European Central Bank (ECB) announced on Dec. 8 that it would extend its bond-buying program through December 2017 rather than end it in March as it originally intended. Starting in April, however, the bank will decrease its bond purchases from 80 billion euros ( billion) a month to 60 billion euros a month. The bank also announced it would keep its benchmark interest rate at zero.

The bank's governing council said in a press release that the bond-buying program, known as quantitative easing, could be extended again if necessary. The institution also said it may expand the size of the program at any time if the eurozone's financial outlook worsened. After the announcement, ECB President Mario Draghi said the bank would change how it buys bonds. Currently, the bank focuses on buying riskier bonds. But under the new strategy, it could start buying bonds issued by European countries with yields less than the ECB's deposit rate (now at -0.4 percent), such as German short-term debt.

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The ECB began its quantitative easing program in March 2015, initially spending 60 billion euros a month and later increasing its purchases to 80 billion euros a month. But the program is controversial: Some European governments believe it is key to supporting the eurozone's fragile economic recovery, while others (Germany in particular) believe it unfairly burdens German savers. The dispute plays into the ongoing conflict between Northern and Southern European countries. Indebted Southern European states have benefited from the ECB's monetary policies, but some of their northern counterparts have criticized it, wary of what they perceive to be a wealth transfer mechanism. With the most recent announcement, the ECB seems to be trying to appeal to both regions by continuing the program while scaling down its purchases.

Quantitative easing has helped to keep borrowing costs tolerable for most eurozone member states, despite the political and economic uncertainty caused by recent upsets such as the Brexit. The uncertainty is likely to persist in 2017, considering the upcoming elections in France, Germany and potentially Italy, but the program should continue to keep borrowing costs to a manageable level. Reflecting better economic conditions on the Continent, the ECB raised its forecast for gross domestic product growth in the eurozone. According to the bank, the currency zone's economy will grow by 1.7 percent in 2017, up from previous estimates of 1.6 percent. The ECB also expects inflation to remain below 2 percent through 2019.

"EU: Central Bank Will Continue Quantitative Easing Next Year" is republished with permission of Stratfor.

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