Alexander Ng

Fri, Dec 14

A Look back at the ECB Quantitative Easing Programme

Following the final European Central Bank (ECB) Press Conference for the year, Mario Draghi officially announced on 13th December that the Asset Purchase Programme (APP) will come to a close by the end of December 2018.  The programme began in March 2015 with the purpose to promote growth in Eurozone through an aggressive stimulus quantitative easing (QE) program with the purchase of both government and corporate bonds by the ECB.  The 4-year-long QE scheme injected more than €2.6trillion to maintain Eurozone stability. 

ECB had set out at the start of the QE programme a monthly net asset purchase of €60 billion in government bonds at a time when inflation rate was in negative territories.  Within the first year following the launch of the programme, the Eurozone inflation rate had a steady increase to peak twice above 0% but failed to raise above 0.3%.  In April 2016, at the height of the Greece debt crisis, the monthly bond purchase amount was stepped up to €80 billion.  At the same time, ECB introduced the purchase of corporate bonds as well under the Asset Purchase Programme.  In a year’s time, the inflation rate punched through the 0% mark and rocketed up to the targeted 2% by April 2017.  After successfully reaching the 2% inflation target, the monthly purchase was reduced back to its original monthly amount of €60 billion.  In October 2017, Draghi began revealing plans to phase out the QE program and reduced the monthly purchase amount by half to €30 billion from the start of 2018.  As part of the phasing out, the amount was again halved to €15 billion from October 2018 into Q4 of 2018.    

Throughout this period, the main refinancing rate from ECB was kept at 0.0% after the last rate cut in March 2016 from previous 0.05%.  With the QE programme being the main driver to overcome economic stagnation, ending the asset purchase is viewed as “taking the foot off the gas pedal” as the economy approaches a softening phase.  With ECB aiming to once again make interest rates its primary monetary policy tool to maintain growth stability, a response to any further slowdown would likely be to push out any rate hike expectations even further, a relatively easy move.  It is likely to be years before ECB rates reach a ‘neutral’ level, even if there were an unexpected upturn or a surge in inflation as we step into 2019.