ECB's QE is dead, long live QE!

  • As widely expected the ECB decided to keep rates unchanged while formally ending the asset purchasing program.
  • The ECB provided a forward guidance on rates saying it won’t move rates at least through the summer of 2019.
  • The forward guidance on reinvestments was also given to make sure the market saw a clear phasing of both rate hikes and reinvestment policy.
  • The faith of EUR/USD is now in hands of the Federal Reserve that is expected to raise rates next Wednesday and to provide a fresh outlook for 2019. 

The ECB rate decision came out in line with market expectations with the Governing Council keeping rates unchanged at 0.25% for the marginal lending facility and the deposit facility at -0.40%. The ECB also decided to end the asset purchasing program but made sure to provide a clear forward guidance on reinvestments of proceeds from already maturing asset saying that it “intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.”

Regarding the macroeconomic projections, the ECB lowered the mid-term growth projections and kept inflation projections broadly unchanged. The ECB President Mario Draghi though acknowledged softer external demand with the risk of protectionism, geopolitics and financial market volatility still persists. The Eurozone domestic demand continues to underpin the e growth together with sound labor market conditions and raising wages. 

In terms of risks, Draghi repeated the list of risk to the growth and monetary policy outlook mentioning protectionism, emerging markets vulnerability, geopolitical risks, and financial markets volatility. On balance though, Draghi said the growth outlook is moving to the downside owing to the persistence of the above-mentioned uncertainties.

It is important to note that the ECB considers the asset purchasing program being a permanent part of the ECB monetary policy toolkit now and it is ready to re-use it, should the situation justify the move.

The current asset purchasing or quantitative easing as it is popularly called is over, long live QE!

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