In the light of a European economy which is visibly shaping up well and of vanished deflation risks, the ECB decided today to adjust its monetary-policy alignment. But the eurozone’s monetary authorities are proceeding extremely cautiously on the road leading to greater monetary-policy normality. Although the volume of monthly asset purchases under the APP is going to be halved to EUR 30 billion from January onwards, the Governing Council has simultaneously resolved to extend the duration of the programme until at least September 2018. The size of the APP is thus being enlarged by a further EUR 270 billion. If the inflation trend does not take the desired direction, the Council is standing ready to increase the APP in terms of size and/or duration. In addition, Draghi has hinted that the purchase programme will not be wound down from one day to the next in the autumn of 2018 – net purchases will presumably be tapered very gradually.
Europe’s top monetary custodian has also emphasised that the ECB will remain active in the bond market “for an extended period of time“ after the end of its net asset purchases, reinvesting principal payments from maturing assets purchased under the APP. The monetary custodians have also reaffirmed its forward guidance on the key-rate trend in order to forestall an undesirable upward movement in longer-term capital-market yields, pledging that the key ECB rates will remain at low levels for an extended period of time “well past the horizon of the net asset purchases.” The banking sector is thus going to be provided with ample liquidity also in future.
The fact that the ECB is cutting the volume of bond purchases in half from January onwards does, it is true, mean that it is taking its foot off the gas to some extent, but the central bank’s monetary-policy stance is still set to remain ultra-accommodative for the time being. This is made clear, amongst other things, by the fact that Draghi has put more emphasis on the importance of PSPP-related reinvestments and thus on the size of the bond holdings, which is not going to decrease. Longer-term capital-market yields should therefore remain in check as a result, which will be advantageous for the progressive economic recovery. As for the future monetary-policy alignment, there is a risk of inflation spiking to a surprisingly pronounced extent, which would force the ECB to shift to a more restrictive stance, thereby choking off the economy. For this reason, the monetary custodians would be well advised to plot their future course in a cautious and foreseeable manner.