FRANKFURT, Germany – The European Central Bank cut its economic growth forecasts Thursday, highlighting the risks confronting Europe’s economy even as it ended a massive bond stimulus program.
“The balance of risks is moving to the downside,” ECB President Mario Draghi said at a press conference, citing trade tensions, vulnerabilities in emerging markets and volatility in financial markets.
The ECB confirmed it will end net bond purchases under its stimulus program this month, closing the chapter on a period of extraordinary activism by one of the world’s major central banks.
But the bank softened the move by pledging to hold its 2.6 trillion euros ($2.9 trillion) stock of bonds for “an extended period of time past the date when it starts raising the key ECB interest rates,” according to a statement published on Thursday.
The decision by the ECB to end its giant bond-buying program, known as Quantitative Easing or QE, was signaled earlier this year and comes years after the Federal Reserve and Bank of England wound down their own bond purchases.
However, the end of the program has coincided with an economic slowdown in the eurozone. ECB President Mario Draghi is expected to discuss the risks to the region’s economy at a news conference starting at 13.30 GMT, where he will also present new staff forecasts for growth and inflation through 2021. The risks range from international trade tensions to a messy Brexit to a possible recession in the region’s number-three economy, Italy.
The ECB lowered its 2018 forecast for gross domestic product growth in the eurozone by 0.1 percentage point to 1.9 percent and shaved its 2020 forecast by a similar amount to 1.7 percent.
“The decision to end QE now is more about politics than economics,” because it will please ECB officials who have been critical of the bank’s bond purchases, particularly its German contingent, said Paul Diggle, an economist with Aberdeen Standard Investments. “If you squint hard enough, the economic data can just about justify the decision.”
The euro has slid 9 percent against the dollar since Feb, as the Fed hiked interest rates three times this year, but the ECB signaled it would be slow to follow suit.
ECB officials have recently played down concerns about the recent economic slowdown, arguing that it’s natural after years of brisk growth and partly reflects temporary factors such as bottlenecks in Germany’s auto industry. Mr. Draghi can point to almost six years of uninterrupted economic growth and an inflation rate that is roughly in line with the ECB’s target of just below 2 percent.
Officials at the ECB argue there is little advantage in extending QE again given that the bank has accumulated 2.6 trillion euros stock of bonds, which it is expected to hold for at least two years. Investors will listen closely for details of how the ECB might reinvest proceeds of maturing QE bonds.
“There hasn’t been a sense that ECB has stopped buying, quite the opposite,” said Marchel Alexandrovich, an economist in London with US investment bank Jefferies. “The ECB behind the scenes is buying a lot of paper, no one quite knows how much.”
The ECB can also steer the economy by guiding investors on the timing of future interest-rate hikes. In its statement, the ECB pledged to hold its key interest rate at its current level of minus 0.4 percent at least through next summer. Investors don’t expect a full 0.25 percentage-point rate increase before early 2020.
Draghi might signal heightened concern about the economy, or send a clearer signal that he doesn’t expect interest rates to rise until later next year. He could also announce a new batch of long-term loans for banks, to ease possible tensions next year, although that decision might be delayed.
A key concern for ECB officials is Italy, whose $2 trillion economy shrank in the three months through September, aggravating concerns around the country’s weak banks and high government debt.