The European Central Bank has signalled that market turmoil and mounting risks to the eurozone economy will not deter it from withdrawing one of the most important strands of its crisis-era stimulus, after it confirmed plans to halt the expansion of its quantitative easing programme by the end of this year.
Speaking in Frankfurt on Thursday, bank president Mario Draghi said he remained confident in the eurozone’s “broad-based economic expansion”. He also said he believed the Italian government — which is defying EU spending rules with its budget plans — would reach agreement with the European Commission.
However, Mr Draghi did acknowledge “weaker momentum” behind the eurozone economy,in the light of data pointing to emerging challenges in Germany and France, the eurozone’s two biggest economies.
The ECB’s governing council said in a statement that it still “anticipates” that it will end the €2.5tn programme at the end of this year. The bank is buying €15bn of mostly government bonds a month.
After more than a decade of riding to the rescue of markets, central banks around the world are intent on stepping back. The Federal Reserve has signalled that it will ignore pressure from US president Donald Trump and keep raising interest rates to cool the US economy.
Mr Trump has blamed the Fed for the stock market rout, describing the central bank’s policies as “loco”.
International central bankers want to avoid being seen to be unduly influenced by governments and reassert their independence to set monetary policy, free from any interference from politicians.
The controversy over Italy’s budget has brought the issue to the fore in Europe. Rome’s stand-off with the European Commission over its plans to run a big budget deficit has raised the populist government’s borrowing costs. Italian legislators have called for the ECB to reconsider its plans to stop asset purchases under its landmark quantitative easing programme at the end of the year.
Senior EU officials are starting to acknowledge that the outlook is no longer as rosy as thought at the beginning of the year.
A slide in a closely watched poll of purchasing managers to a two-year low on Wednesday provided a further sign that growth in the single currency is slowing.
The influential Ifo confidence indicator, compiled by the Munich-based think-tank, fell to 102.8 points in October from 103.7 points in September. “Growing global uncertainty is increasingly taking its toll on the German economy,” said Clemens Fuest, president of the Ifo.
On Thursday, the 25 member governing council said it expected the bank’s key interest rates to remain at their present levels at least through the summer of 2019 “and in any case as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2 per cent over the medium term”.
The ECB views an escalation of the global trade war between the US and China as the biggest threat to the eurozone economy, but maintains that it still has ample stimulus in place to cushion the impact of a prolonged slowdown in growth.
The bank will buy about €200bn worth of bonds during the first nine months of next year by reinvesting the proceeds of securities it has bought under QE but which have now matured. The benchmark main refinancing rate is set to remain at its record low of zero — and deposit rates at minus 0.4 per cent — until the autumn of next year.
The bank also believes the stronger labour market will boost demand through more jobs and faster wage growth.