By Mike Antuono, International Business Writer
On Thursday October 20, 2016, Mario Draghi of the European Central Bank quelled fears of a taper or halting of the ECB’s bond buying program. He reported those rumors to have come from “an unreliable source.”
The ECB’s aggressive quantitative easing program has been in effect since March 2015. The European Central Bank’s strategy involves the purchase of €80 billion of bonds every month. This strategy mirrors those undertaken by the United States’ Federal Reserve Bank and the Bank of Japan.
This bond buying, known as quantitative easing, involves the purchase of assets in large quantities in order to flood the market with capital. The Central Bank serves as a massive supplier of demand for bonds, driving their prices up, and yields down. Bond prices move inversely to yields. Lower interest rates help spur economic growth through increased lending. This flood of capital into the bond markets should in turn spur economic growth and inflation.
Draghi noted that any major decisions coming from the ECB would wait until a December meeting – this reflects statements made by the Fed. Regardless of this statement, it is unlikely any major changes toward their current monetary policy will be made.
Consumer prices in the eurozone rose at an annualized rate of 0.4 percent, far from the 2 percent inflation target they have set. The ECB remains “committed to preserving the very substantial degree of monetary accommodation” necessary to reach the central bank’s inflation target of just under 2 percent. “To that end, we will continue to act if warranted by using all the instruments in our mandate.” This assurance calmed markets somewhat, following periods of volatility leading up to the meeting.
While monetary policy has had positive effects in the eurozone, it can’t continue forever. Equity prices have been propped up as a result of artificially low interest rates.
Free money cannot last forever and eventually, the programs will have to come to an end. In addition to sever asset price distortion, another side effect of the ECB’s program is the potential of a scarcity of safe financial assets; a lack of supply of safe government bonds could disrupt a key source of short-term financing through the repo market. Draghi noted this was a major point of contention in their last meeting.
Until economic and market conditions improve further in the eurozone, it is very unlikely the ECB will make any major changes to its quantitative easing program.
The general sentiment in the markets shows improvement, but it is slow moving. Further data releases leading into December will guide policy decisions coming from central banks. Until then, the anticipated course of action seems to be a continuation of currently implemented programs when they expire in March,
The Euro briefly spiked before returning to normal levels over the duration of Draghi’s statements.
A version of this article appeared in the Tuesday, October 25th print edition.
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