The European Central Bank left interest rates unchanged as expected on Thursday and signalled an early end to its last remaining bond purchase scheme, wrapping up a decade-long experiment in hoovering up debt across the 20-nation euro zone.
The ECB raised interest rates to a record high earlier this year but unexpectedly benign inflation data over the past few months has all but ruled out further policy tightening, shifting the debate to how fast it will reverse course.
Looking to stem these intensifying rate cut bets, the ECB did not even hint that policy easing was creeping over the horizon and instead maintained its guidance for steady rates ahead.
“The key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to (the inflation) goal,” the ECB said in a statement.
Markets on the other hand see two cuts by April and 155 basis points of easing in all of 2024, even though a host of conservative policymakers have tried to push back against those expectations in the run up to the December meeting.
Pulling the plug on its last bond-buying scheme, the 1.7 trillion euro Pandemic Emergency Purchase Programme, the ECB said it will start tapering reinvestments from mid-2024.
The ECB said full reinvestment under the PEPP will end on June 30 and the portfolio will then fall by 7.5 billion euros per months until the end of the year.
Previously, all cash from maturing debt in the PEPP was set to be reinvested through the end of 2024 but a host of policymakers have argued the programme has fulfilled its purpose, so there was no economic logic behind keeping to the original end date.
The ECB’s hesitation was likely because of a reluctance to give up its primary instrument for stabilising markets should investors pile undue pressure on some countries, particularly indebted nations around the Mediterranean.
The ECB could skew PEPP reinvestments towards certain countries and the scheme’s demise leaves it with the Transmission Protection Instrument (TPI), an untested bond buying programme that has a much higher bar for deployment.