ECB to End Bond Buys as Crisis Policies Wind Down

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06/14/2018 | 02:09 pm


By Tom Fairless



RIGA, Latvia--The European Central Bank laid out plans Thursday to wind down its EUR2.5 trillion ($2.9 trillion) bond-buying program, closing a controversial chapter in its short history and setting it on a path toward higher interest rates.



The move draws a line under a contentious policy that at times divided the ECB's rate-setting committee and provoked sharp criticism from public officials in the currency bloc's biggest economy, Germany.



The ECB's decision to start phasing out easy-money policies comes despite mounting evidence that the eurozone economy is slowing, amid threats ranging from international trade conflicts to political turbulence in Italy.



Even with Thursday's move, the ECB lags far behind the Federal Reserve in unwinding crisis-era policies taken after the collapse of Lehman Brothers one decade ago.



On Wednesday, the Fed raised its policy rate one-quarter percentage point to a range between 1.75% and 2% and penciled in two more increases in 2018, amid rising inflation and the lowest jobless rate in nearly two decades.



In contrast, the ECB kept its deposit rate unchanged at minus-0.4% and said it wouldn't raise interest rates "at least through the summer of 2019." That indicates that the policy gap between the world's two biggest central banks will widen further, with potentially major effects on bond and currency markets.



In a statement, the ECB said it would reduce its bond purchases--due to run at EUR30 billion a month through September--to EUR15 billion in October through the end of December, when the purchases will end.



Investors will now turn to ECB President Mario Draghi's news conference at 12:30 p.m. GMT for clues as to how quickly the bank might start to raise short-term interest rates.



The ECB was the last of the four major developed-country central banks to engage in large-scale bond purchases, known as quantitative easing or QE. It only launched QE in 2015, more than six years after the Fed, when policy makers feared the eurozone would fall into deflation, or a spiral of ever-lower prices.



The ECB's move leaves Japan as the only major central bank with no end in sight to its purchases of bonds and other assets. The Bank of Japan meets Friday and isn't expected to announce any policy changes.



The ECB has made up for its initial hesitance, which reflected reluctance on the part of a central bank rooted in Germany's conservative philosophy to buy government debt.



The bank's balance sheet has doubled since 2014, to EUR4.6 trillion, or around 43% of the region's annual economic output. The Fed currently holds assets worth around 22% of the U.S. economy, after a small runoff.



While deeply contested, especially in Germany, the ECB's bond purchases have coincided with a period of strong economic growth. The eurozone economy outpaced the U.S. over the past two years and its unemployment rate has fallen to 8.5%, the lowest level in almost a decade.



Proponents say the program has pushed away the risk of deflation and compressed interest rates for businesses and consumers, supporting borrowing and growth.



Critics argue the ECB's purchases coincided with steep increases in the prices of property and other assets and made it easier for unviable "zombie" firms to stay alive. Some countries, notably Greece and Italy, still have large volumes of nonperforming loans.



Some analysts and officials argue that QE mainly worked by reducing the value of the euro against other currencies such as the dollar, thereby improving the competitiveness of eurozone businesses in international markets.



There is limited evidence for one argument often made in support of QE in Europe--that it gives vulnerable governments time to carry out economic reforms. While France and Spain have pushed through some reforms, Italy has done very little. Italy's elevated public debt levels helped trigger a bond-market rout in May, as investors worried about the policy plans of the new populist government.



The ECB's delay in launching QE has yielded some benefits. The phasing out of the program has left few ripples in financial markets--unlike the "taper tantrum" unleashed five years ago when former Fed Chair Ben Bernanke indicated the U.S. central bank would wind down its own program.



Write to Tom Fairless at tom.fairless@wsj.com





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