ECB, Fed moves show global shift away from cheap money
Two of the globe's most powerful central banks are gradually withdrawing the easy-money policies that helped repair the damage wrought by the Great Recession and push stock markets to record highs. It's a sign of confidence in the economy, but with uncertain consequences for consumers and businesses.
As growth picks up in the United States and Europe and with more people finding jobs, the European Central Bank (ECB) and the US Federal Reserve are deeming it unnecessary to support the economy with policies created in darker days of financial uncertainty.
The ECB on Thursday said it would phase out, by the end of this year, its bond-buying stimulus for the 19 countries that use the euro. It had deployed the programme in 2015 to save the region from the risk of falling prices and growth, and as Greece's debt crisis raised questions about the euro's future.
The move came less than a day after the Federal Reserve raised interest rates for the second time this year on Wednesday, reversing rate cuts it started making almost 10 years ago during the financial crisis.
"We are in an altogether different world to only a couple of years ago," said Patrick O'Donnell, senior investments manager at Aberdeen Standard Investments.
The central bank moves, he said, are "another step on the way to removing the extraordinary global monetary stimulus over the last decade".
The ECB's bond purchases were a way of pushing newly created money into the economy. That sought to lower borrowing rates and improve growth and inflation. The ECB wants inflation at just under two per cent, and the last figures show it at 1.9 per cent - technically in line with the goal, but the ECB must also be sure inflation will stay high when stimulus is removed.
The ECB's 25-member governing council said Thursday that the bond purchases would be cut to €15 billion (US$17.7 billion) a month in October, from the current €30 billion. The purchases would then be wound up completely after December.
The bank was careful to stress that it would withdraw support for the economy only gradually, saying its key interest rate would not rise from its record low of zero until at least the summer of 2019.
That means it will be years before monetary policy and interest rates return to more historically normal levels. The goal: avoid a sharp rise in market rates like one that occurred in 2013 when then Fed chief Ben Bernanke mentioned withdrawing stimulus.
However gradual, the exit is nonetheless a milestone for the Eurozone economy, which recovered more slowly from the Great Recession than the US. Unemployment in the US is 3.8 per cent, less than half the Eurozone's 8.5 per cent.
Both the ECB and Fed moves will allow market borrowing rates to rise gradually. That could make loans somewhat more expensive for homebuyers and companies looking to invest. But it could also increase returns for savers and make it easier for pension savings to grow.