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E.C.B. Extends Bond-Buying Program to Protect Eurozone Economy E.C.B. Extends Bond-Buying Program to Protect Eurozone Economy
(about 3 hours later)
FRANKFURT — The European Central Bank said on Thursday that it would buy large quantities of government bonds and other assets for longer than initially planned, an attempt to protect the eurozone economy from an increasingly unpredictable political landscape. FRANKFURT — The European Central Bank said on Thursday that it would buy large quantities of bonds and other assets for longer than planned but would cut the size of the purchases, a decision it insisted did not a signal that a much anticipated “tapering” of stimulus measures had begun.
Investors are showing nervousness about economic and political stability in the 19-nation eurozone after Italian voters rejected constitutional changes over the weekend and amid rising anti-European Union sentiment in much of the bloc. If investors demand higher premiums to buy government bonds, the increase in borrowing costs would most likely ripple through credit markets and make it more difficult for businesses in the eurozone to grow. “Tapering” is a loaded word in financial circles. By buying enormous amounts of bonds in recent months, the European Central Bank has kept market interest rates low, part of efforts to encourage lending and bolster economic growth in the 19-country eurozone. But by reducing its purchases over time, it could limit or reverse this effect.
To prevent that, the European Central Bank said that it would continue buying government bonds and other assets at least through December 2017, nine months longer than previously announced. The central bank has been spending 80 billion euros, or $86 billion, on government and corporate bonds each month in an effort to keep interest rates at record lows and to stimulate the economy. It will continue to do so, but from April will lower the monthly amount to €60 billion. It recalls the so-called taper tantrum in the United States in 2013 after Ben S. Bernanke, then the chairman of the Federal Reserve, suggested that the American central bank would begin reducing its asset purchases. Market turmoil followed as investors pulled money out of emerging markets and instead bought Treasury bonds in anticipation of higher interest rates.
Analysts interpreted the reduction as a signal that the central bank was beginning to wind down the stimulus program — so-called tapering. “There is no question about tapering,” Mario Draghi, the president of the European Central Bank, said at a news conference. “Tapering has not been discussed today.”
“Even without calling this tapering, the E.C.B. just announced tapering,” Carsten Brzeski, chief German economist at ING-DiBa in Frankfurt, said in a note to clients. The response on financial markets showed that investors did not believe Mr. Draghi’s rejection of the word, at least initially.
Although the central bank extended the time frame for asset purchases to the end of 2017 from March, investors focused on plans to reduce the asset purchases beginning in April to 60 billion euros, or about $64 billion, from €80 billion.
Markets settled down after Mr. Draghi said that he defined tapering as “a process where purchases would go to zero.”
“That has not been discussed,” he said, adding: “There is no tapering in sight. The E.C.B. is going to stay in the markets.”
European stocks rose and the yields on eurozone government bonds receded after Mr. Draghi offered those reassurances. Analysts who had initially declared the beginning of tapering modified their views.
“At first glance, today’s decisions looked, walked and quacked like tapering,” Carsten Brzeski, chief German economist at ING-DiBa in Frankfurt, said in a note to clients. “Draghi gave his best to convince everyone that it is not tapering. We tend to believe him.”
Below are other issues that have raised concerns among some economists, investors and central bankers.Below are other issues that have raised concerns among some economists, investors and central bankers.
The reasoning behind the European Central Bank’s asset purchases is that they are one of the most effective ways to bring inflation in the eurozone closer to the official target of just under 2 percent. (In November, the annual inflation rate was 0.6 percent, a level considered unhealthy for the economy.)The reasoning behind the European Central Bank’s asset purchases is that they are one of the most effective ways to bring inflation in the eurozone closer to the official target of just under 2 percent. (In November, the annual inflation rate was 0.6 percent, a level considered unhealthy for the economy.)
But that reasoning could be weakening. Mr. Draghi said on Thursday that inflation would rise next year along with the price of oil. That is allowing the central bank to reduce the size of its asset purchases, which are a form of money printing.
Some economists argue that, with oil prices low and inflation picking up in the United States, eurozone inflation is almost certain to rise in 2017. But he also suggested the eurozone economy still was a long way from being in good health.
If so, Germany and other countries will most likely press for cuts to the bond buying, which critics say has distorted prices. When the European Central Bank ends the so-called quantitative easing program, they say, the shock to bond prices could destabilize the fragile eurozone economy. Signs of higher inflation have already prompted some economists to press for cuts to the bond buying, which critics say has distorted prices. When the European Central Bank ends the so-called quantitative easing program, they say, the shock to bond prices could destabilize the fragile eurozone economy.
“The E.C.B.’s argument that the inflation rate in the euro area is too low will no longer be applicable in 2017,” Clemens Fuest, president of the Ifo Institute, an economic research group in Munich, said in a statement on Tuesday. “The negative side effects of the E.C.B.’s bond purchases will come to the fore.” The central bank’s “argument in favor of bond purchases no longer holds for 2017,” Clemens Fuest, president of the Ifo Institute, an economic research group in Munich, said in a statement. “The negative side effects of the E.C.B.’s bond purchases will come to the fore.”
For years, Mario Draghi, president of the European Central Bank, has been beseeching leaders of eurozone countries to take steps to help their economies grow faster, warning that the European Central Bank cannot guarantee the health of the common currency area on its own. As he has for years, Mr. Draghi beseeched leaders of eurozone countries to take steps to help their economies grow faster, warning that the European Central Bank cannot guarantee the health of the common currency area on its own.
But when Italian voters rejected constitutional overhauls on Sunday, they also demonstrated how difficult it was for leaders to effect change.But when Italian voters rejected constitutional overhauls on Sunday, they also demonstrated how difficult it was for leaders to effect change.
Resistance to overhauls in Italy, as well as in France, has strengthened the arguments of those who say that European Central Bank support for the eurozone economy has allowed national leaders to procrastinate rather than deal with the region’s problems, such as high government debt or laws that stifle entrepreneurship.Resistance to overhauls in Italy, as well as in France, has strengthened the arguments of those who say that European Central Bank support for the eurozone economy has allowed national leaders to procrastinate rather than deal with the region’s problems, such as high government debt or laws that stifle entrepreneurship.
Central bank measures have “hollowed out the principle of individual responsibility,” Jens Weidmann, president of the Bundesbank in Germany and an influential member of the European Central Bank’s Governing Council, said in a speech in Munich on Monday. Mr. Draghi rejected those arguments on Thursday.
“It’s dangerous to imagine that central banks can use cheap money to fight the causes of finance and debt crises, globalization angst or rising populism,” he said. Investors are showing nervousness about economic and political stability in the eurozone after the Italian referendum, as anti-European Union sentiment rises in much of the bloc.
One of the biggest fears in the wake of the Italian vote, and Prime Minister Matteo Renzi’s resignation on Wednesday, was that political uncertainty would upset plans to pump fresh capital into struggling Italian banks. If investors demand higher premiums to buy government bonds, the increase in borrowing costs are likely to ripple through credit markets and make it more difficult for businesses in the eurozone to grow.
Those fears seem to have subsided for now. One of the biggest fears in the wake of the Italian vote, and the resignation on Wednesday of the country’s prime minister, Matteo Renzi, was that political uncertainty would upset plans to pump fresh capital into struggling Italian banks.
Shares of big Italian banks including UniCredit or Intesa Sanpaolo fell after the vote but have since recovered their losses and even increased in value. Some investors apparently decided that fears of a bank meltdown were overblown and that the vote might provide a catalyst for government leaders and bank executives to move quickly to resolve issues, such as the huge number of bad loans. Mr. Draghi said those banks could be fixed — the European Central Bank functions as the eurozone’s supreme bank overseer, and it is ultimately responsible for the health of the area’s banking system.
Still, Italian lenders are likely to be a subject of discussion for central bankers meeting in Brussels on Thursday. The European Central Bank functions as the eurozone’s supreme bank overseer, and it is ultimately responsible for the health of the area’s banking system. But Mr. Draghi also listed all the risks threatening global stability, including Britain’s vote to exit the European Union and the election of Donald J. Trump in the United States. Mr. Draghi described the president-elect as having a “radical” new view of the world.
“All in all, the banking sector, and perhaps more generally the financial sector, is stronger than it used to be before the crisis,” Mr. Draghi told the Spanish daily El País last week, referring to eurozone banks in general. “But in the medium term, it is not yet clear what the consequences of past, current and future political uncertainty will be. There will be consequences, that much is certain.” “I think what central banks can do,” he said, “is keep a steady hand.”