The European Central Bank said Thursday it will phase out at year-end its stimulus program, which is credited with helping the 19 countries that use the euro recover from the financial crisis.
The bank said after a policy meeting of its 25-member governing council that the stimulus program’s bond purchases would be reduced to 15 billion euros ($17.7 billion) a month — from the current 30 billion euros — from October. They would then be wound up completely after December.
The bank also said its interest rates would not rise until at least the summer of 2019.
The bank’s move toward the exit comes a day after the U.S. Federal Reserve decide to make its second interest rate increase this year and indicated more were coming. The central banks are withdrawing stimulus efforts that started during the Great Recession as their economies recover.
The decision also indicates the ECB is not deterred by questions about the new, populist government in Italy. The coalition between the anti-establishment 5-Star Movement and the anti-immigration League have promised spending that could lead to Italy violating eurozone limits on deficits. At various times the parties have also questioned Italy’s membership in the euro itself. The country’s finance minister has, however, helped calm markets by saying recently that his country has no intention to leave.
People are paying attention to the bond purchase exit because it will have wide ranging effects in markets and the economy. The purchases, which pump newly created money into the financial system, have driven down longer-term interest rates for borrowers such as governments and home buyers but have reduced returns for savers and made it harder to fund pension savings due to low returns on safe investments.
The stimulus has also pushed up the prices of investments likes stocks and bonds. As the stimulus is ended and then withdrawn by letting the bond holdings run down over a period of years, those effects will go into reverse. More conservative investments will become relatively more attractive.
The ECB’s mission is to keep prices growing at a steady and modest pace of just under 2 percent annually. It enacted stimulus as the region was afflicted with an extended period of very low inflation.
Inflation has recovered — it was 1.9 percent in May — but the bank must be able to show that inflation will stay in line with its goal even after the stimulus has been stopped.
The bank’s short-term interest rate benchmark remained at a record low of zero and its rate on deposits from commercial banks stayed at minus 0.4 percent. That is a penalty aimed at pushing banks to lend the money instead of leaving it at the central bank.