“We are confident that as the conditions will continue to improve, the inflation rate will gradually converge in a self-sustained manner, as we’ve defined many times, and in a durable way to our objective,” – ECB President Mario Draghi
European Central Bankers have grown confident that their monetary policy stance will support asset prices, bringing inflation to the European Central Bank’s 2% target mark.
The eurozone has shown resilience and robust growth, despite the political tensions bubbling beneath the surface.
However, like many other nations across the world, inflation remains subdued. The bank has hinted that it will continue its bond-purchasing programme until the third quarter of 2018.
The lack of wage growth is the driving force of low inflation in the eurozone, therefore the bank will continue with its easy money programme.
Therefore, the bank will push ahead with its bond-purchasing to sustain “an extraordinary degree of monetary accommodation.”
From January, the bank is expected to buy fewer bonds each month, slowly exiting from the market. Currently, the bank buys €60 billion, experts note that this could fall to €20 billion given that the ECB extend the quantitative easing programme until December 2018.
The bond-purchasing taper can be seen as a substitute for raising interest rates. Since the bank will reduce the amount of bonds it will purchase, this will diminish expectations of an interest rate hike into 2019.
Previously, the bank had promised to keep interest rates at low levels beyond the ‘’horizon’’ of the quantitative easing programme, to ensure economic recovery in the region.
Meanwhile, the US interest rates are forecasted to rise by 2019, which should reduce the demand for the single currency as investors plunge bullish bets into the dollar. One of the main hurdles of the ECB is the strength of the euro, the gap between interest rates in the US and eurozone should provide a solution to that problem.
Additionally, the slower pace of bond-purchasing provides a signal to markets that supportive monetary policy is ending, while assuring markets that interest rates will remain low for a longer period of time. This ensures the market does not go into shock, instead pricing in changes as they become more likely.
Central bankers meet next week, the 26th of October, to discuss the path for monetary policy.