The European Central Bank will debate on Thursday whether to end its huge asset purchases by year-end, in what would be its biggest step towards dismantling crisis-era stimulus credited with pulling the euro zone economy out of recession, Reuters reports.
Financial investors are coming to terms with the end of a decade of easy money from the world’s top central banks, with the Federal Reserve on Wednesday raising interest rates for a seventh time in 3-1/2 years in a further shift from policies used to battle the 2007-2009 financial crisis and recession.
Meeting as growth is slowing and political populism threatens to set off market turbulence, the ECB is expected to argue that its 2.55 trillion euro ($3.00 trillion) bond-buying scheme has done its job in bringing the 19-member currency bloc back from the brink of collapse.
Whether policymakers take the actual decision at their meeting in Riga on Thursday or hold off until July appears secondary as they have long argued that the scheme, commonly known as quantitative easing (QE), should be concluded and the policy focus shift to the expected path of interest rates.
The biggest complication could be the increasingly murky economic outlook, weighed down by a developing trade war with the United States, a populist challenge from Italy’s new government and softening export demand.
But these factors could actually hasten the ECB’s decision rather than hold it back as the bank has little policy firepower left and a further weakening of the outlook could make a later exit more difficult.
“We believe the ECB may be in a hurry to close the QE chapter,” Bank of America Merrill Lynch said in a note to clients. “We think this is essentially political, as the ECB would not want its monetary policy to be affected by claims of supporting or conversely impairing the new policy course in Italy.”
Italian bond yields rose sharply this month as a new government promised increase spending, foreshadowing a clash with Brussels, which is pushing Rome to cut the euro zone’s second-biggest debt pile.
Italy’s 10-year bond yielded 2.8 percent on Thursday, compared to just 1.7 percent in early May before its coalition of anti-establishment forces took office.
A broader slowdown could also make it harder to end stimulus, but the ECB has no mandate to prop up growth and Draghi is likely to argue that current rate of expansion is healthy enough to generate inflation, the ECB’s ultimate aim.
To view a graphic on ECB policy and bond yield developments, click: ECB policy and bond yield developments