Look Ma, No Hands

ECB announced end of bond buying

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What's going on?

On Thursday, the European Central Bank (ECB) confirmed its long-anticipated plan to relieve the eurozone of the training wheels that have been stabilizing its economy for the last four years.

What does this mean?

When interest rates are already low, central banks can buy government bonds in order to further stimulate economic growth (the famous “quantitative easing”). That’s exactly what the ECB’s been doing, to the tune of $3 trillion. Its consistent demand has propped up bonds’ prices (thereby lowering their interest rates, or yields) and made it cheaper for European countries to borrow money to spend on various growth-stoking initiatives.

The ECB will stop spending new money on bond purchases later this month – but it’s not forcing Europe to go completely cold turkey (tweet this). As existing bonds are repaid, it’ll reinvest the proceeds back into other government bonds. It’s not so much that the support’s gone, more that additional support won’t be forthcoming.

Why should I care?

For markets: Europe shakily stands on its own feet.

The ECB’s decision effectively says that euro-spending countries can manage from here. But it also cautioned that economic growth had been slower than expected – and that it may slow further, thanks to political uncertainty (looking at you, Brexit and trade war). Indeed, the ECB actually lowered its forecasts for the eurozone’s economic growth this year and next – as well as for next year’s inflation. Mind how you go, Europe!

The bigger picture: A “synthetic” rate hike.

In dialing back its bond purchasing, the ECB is removing some future demand. That’s likely to drive bond prices lower and increase yields (just as increasing interest rates directly would). More expensive borrowing might be a concern for debt-riddled Italy – although the country said on Wednesday that it’ll work to get its spending under control. The broke buck may now pass to France, where new measures designed to appease protestors will come at a cost. Any worries may intensify when the ECB actually increases rates late in 2019.

Originally posted as part of the Finimize daily email.

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