The ECB has announced it will begin a reduction in its asset purchase programme (APP) in 2018. The decision has been expected since hints were dropped by various ECB officials around the middle of this year. Even so, the announcement was viewed as particularly dovish and German, U.K and French bond yields fell while the euro fell against major currencies.
The Governing Council of the ECB will reduce the pace of bond purchases from €60 billion per month to €30 billion per month, starting in January 2018. The ECB will buy €30 billion per month “until the end of September 2018, or beyond, if necessary” until the ECB believes the path of the inflation rate is consistent with its inflation goals.
Maturing securities held by the ECB will be re-invested for “an extended period of time after the end of its net asset purchases”. This means the balance sheet of the ECB will keep growing until the purchase programme ceases. However, the end of the programme does not mean the ECB’s balance sheet will shrink; it will not begin shrinking until the ECB follows the U.S. Fed’s actions and begins to reduce the pace of bond reinvestments as its bond holdings mature.
The ECB programme is just one part of the central bank’s two-pronged strategy. The other prong is its interest rate policy. Central banks around the world set an interest rate at which banks in its jurisdiction can borrow and lend from each other. In Australia, the RBA has its “cash rate” and the U.S Fed has its “federal funds rate”. The ECB rate is referred to as the “deposit rate”. These official interest rates influence other interest rates in the respective economies and thus affect behaviour of borrowers and lenders.
Currently the ECB’s deposit rate -0.40%. In case readers are baffled by a negative interest rate, it means banks with deposits at the ECB pay interest to the ECB for holding their money. The ECB’s negative interest rate policy will continue unchanged at their present levels “for an extended period of time, and well past the horizon of the net asset purchases.”