Stronger economy firms ECB plans to cut bond-buying

3 min

Frankfurt am Main (AFP)

Encouraged by healthier growth in the eurozone economy, European Central Bank chiefs are more confident about winding down their mass bond-buying programme from early next year, minutes of last month's meeting showed.

Some argued that "conditions were increasingly falling into place that would... provide an opportunity to scale back" the bank's so-called "quantitative easing" (QE) scheme, the account read.

Earlier this week, ECB chief economist Peter Praet seemed to take a more cautious stance, saying the bank may take a longer path to the end of its mass bond-buying scheme than observers expect as it confronts stubbornly low inflation

The ECB has set interest rates at historic lows and buys 60 billion euros ($70.5 billion) of bonds per month in its attempt to boost price growth -- for a total today of more than 2.0 trillion euros.

Policymakers believe the moves encourage banks to lend to businesses and households for mortgages, consumption and investments, powering economic growth and driving up inflation towards the central bank target of just below 2.0 percent.

Economic growth has picked up in the 19-nation single currency area, but the ECB is puzzling over why price growth has not risen in step.

Its internal forecasts for September predict inflation of 1.5 percent in 2017, 1.2 percent next year and 1.5 percent in 2019.

Nevertheless, some on the governing council argue the time has come to wind down bond purchases, while the bank must make a decision before the programme runs out in December.

"There were indications that the economic expansion was becoming increasingly self-sustaining," without the need for so much central bank support, some members said.

The two biggest questions are how quickly the central bank will wind down its purchases, and how explicitly it will outline its plans.

Observers long expected the ECB to follow the example of the US Federal Reserve and lay out a detailed scheduled for reducing bond purchases step-by-step from January.

But recent comments from board members suggest the bank may decrease its buys one step at a time, gauging the economic impact before moving again.

"Since the economy has continued to fare well, the ECB should feel justified in easing the pressure off the monetary policy accelerator," said Capital Economics analyst Jennifer McKeown.

Meanwhile, recent fears that the euro's appreciation against other currencies could brake growth and inflation have receded, removing another hurdle to cutting bond-buying, she added.

The minutes confirmed ECB President Mario Draghi's promise last month that "the bulk of the decisions" on bond-buying will be taken at the October 26 governing council meeting -- although talks on the shape of the changes remained "very preliminary".