European Central Bank President Mario Draghi will be buying bonds at a lower rate, but for a longer time.
That was the upshot of the ECB’s decision on its monetary policy plans for 2018, made in Frankfurt on Thursday.
Monthly purchases will be halved to 30 billion euros ($35 billion) in January, and run until September. Even then, Draghi said there won’t be a “sudden end to the buying” and the shift shouldn’t even be called tapering.
Most of the Governing Council favored keeping the program open-ended in case the burgeoning economic expansion stumbles or inflation stays sluggish. That message helped weaken the euro and lift stocks. Bloomberg economists foresee monthly purchases of 15 billion euros for a further six months after September, assuming wage growth remains muted.
Here are some other things we learned from Draghi:
No Real Limits
While some policy makers see the ECB with a spare capacity of only about 200 billion euros of purchases before it runs into shortages under its current rules, Draghi said the bank isn’t constrained:
“Our program is flexible enough that we can adjust its size. We can carry it through smoothly, and that’s been the evidence we’ve given until now.”
The ECB can still increase the program in size or duration, and it will continue to reinvest funds from those assets which mature. That could be “massive,” Draghi said. Kim Liu, a strategist at ABN Amro Bank NV, estimated such reinvestments could total 15 billion euros to 20 billion euros of actual purchases a month.
The central bank also committed to continue lending as much money as banks want at fixed interest rates through at least 2019, providing the market with further liquidity.
Not all of the 25-member Governing Council agreed with Thursday’s decision. Draghi said that there was broad consensus on some issues and a majority on others.
He also said that prudence inspired a “large majority” of policy makers to favored the open-ended stance, implying that there’s also a minority that want to put a lid on it. This dispute will likely flare up again in 2018 when they have to decide what to do next.
Interest rates will remain “at the present levels for an extended period of time, and well past the horizon of our net asset purchases,” Draghi said.
Maintaining that language suggests the ECB’s first increase in borrowing costs may not arrive before 2019. Draghi steps down in October of that year and so could be working hard right up to his exit, perhaps even finishing his term without ever raising rates.
Inflation Is Coming, Eventually
Despite evidence to the contrary, the ECB remains confident that the euro area’s inflation rate is still heading toward the goal of just below 2 percent. That’s driven by domestic demand and an “increasingly robust and broad-based economic expansion,” Draghi said. That chimes with Federal Reserve Chair Janet Yellen’s “best guess” that U.S. inflation will accelerate.
For now, though, domestic price pressures are muted and the 19-nation euro area still depends on “ample” monetary stimulus. That’s a change from the previous meeting when Draghi cited the need for “very substantial” support. Still, he reiterated the need for patience, persistence and prudence.
What Wasn’t Discussed
The Governing Council didn’t consider changing the parameters of the quantitative-easing program or the sequence of possible unwinding. Also unsaid was the composition of what they buy, a debate that could emerge as they start to run out of public-sector debt.
While Draghi barely referred to the euro, which has gained 12 percent against the dollar this year, he went to great pains to emphasize that the biggest buzzword wasn’t mentioned at all: tapering.