The European Central Bank today decided to keep its key interest rate at 0.5 percent as it announced its intention to slow down its EUR 1.85 trillion bond purchase program that has propped up the European economy during the pandemic.
Major central banks around the world, including the Bank of England, were forced to act last year when Covid-19 devastated economies, but with economic growth and inflation, institutions are forced to act.
After keeping borrowing costs low for European governments and businesses, the ECB announced that it would withdraw its pandemic emergency purchase program towards the end of 2021.
ECB President Christine Lagarde signaled a change of direction for the central bank
“The Governing Council of the ECB believes that favorable financing terms can be sustained with a moderately slower pace of net asset purchases under the pandemic emergency purchase program than in the previous two quarters,” it said in a statement.
After the ECB received around € 80 billion in the last six months alone.
Before the meeting, however, analysts had predicted that the purchase rate would slow down to as much as 60 billion euros per month.
In response to the news, the euro appreciated around 0.2 percent against the dollar as European equity markets caught up with losses from earlier trading hours.
Like other central banks, the ECB has played an important role since the beginning of the pandemic
Principal Global Investors chief strategist Seema Shah said the ECB had taken its “first sensible step to reduce” bond purchases, gradually shrinking the size of its balance sheet.
She added, “Over the past week the focus of the market has shifted from when the Fed would begin to taper to a time when the ECB would slow the pace of its purchases, so today’s should Announcement does not come as a surprise.
“Even so, markets are concerned about the risk of restrictive policy error, [ECB president Christine] Lagarde’s efforts to separate the bond purchases from the rate hike will be important in reassuring investors that the central bank is not on the verge of repeating the 2011 monetary policy mistake. “
Inflation in the eurozone is now at a 10-year high, while many nations are also seeing a similar trend as their economies come out of lockdown conditions.
This surge in inflation is limited and likely to be temporary, but it is forcing policymakers to rethink.
The ECB is not expected to make rate changes anytime soon, but today’s changes mark an important shift.
“The ECB is making it clear that its role in the pandemic is coming to an end and should only be relied on in an emergency scenario,” said portfolio manager at Quilter Investors Hinesh Patel.
He added, “This is ultimately positive for investors as markets can now see how things will react under normal political conditions and excessive risk appetite should gradually decline.
“Despite a spike in delta cases, 2022 is a decent year for Europe, and as such, it always seems more sensible to have long-term quality in order to benefit from fundamentals rather than liquidity.”
European equity markets fell again earlier in the day in response to the announcement
To address the economic shock caused by the pandemic, the world’s four major central banks – the ECB, BoE, Federal Reserve, and Bank of Japan – have expanded their asset purchase programs by a total of $ 9.1 trillion to include their economies and the functioning of global financial markets.
However, the tide is now – slowly beginning to turn.
Over the next quarter, the US Federal Reserve is expected to begin scaling back its $ 120 billion monthly asset purchase program launched in response to the pandemic.
US inflation hit 5.4 percent in July, but with “a lot of ground to break” before the country hits full employment, Fed chairman Jay Powell reassured investors in August that rate hikes are a long way off.
All eyes on Andrew Bailey for the Bank of England’s next move
Inflation is rising in the UK too, but the outlook for BoE rates is somewhat different.
The UK’s first rate hike was expected in the summer of 2022, but BoE Governor Andrew Bailey told MPs this week that we may be closer to such a decision.
Despite the “flattening” of the UK economic recovery, Bailey confirmed that half of the central bank policy committee is now convinced that the minimum conditions for a rate hike have now been met.
At the start of the pandemic, the BoE launched a £ 895 billion program to support the UK economy and the functioning of financial markets.
The bank’s security purchases have increased its balance sheet by more than 90 percent since the pandemic began. Its balance sheet has grown from around 20 percent of UK GDP in 2014 to almost 60 percent today.
Despite this growth, the BoE appears less keen to begin unwinding its balance sheet.
At the last meeting, Michael Saunders, a member of the BoE’s Monetary Policy Committee, was the only member to vote to end the £ 895 billion bond purchase program.
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