Frankfurt am Main, Dec 13: The European Central Bank on Thursday formally ended its massive bond-buying scheme, withdrawing a crucial element of support for the economy even as clouds gather over the eurozone outlook.

In a long-awaited move, the Frankfurt institution confirmed that it would stop buying government and corporate bonds at the end of December after a gradual winding down of the asset purchases in recent months.

As expected, the bank's governing council also voted in its final meeting of the year to keep interest rates at record lows “at least through the summer of 2019”.

The governors' decision to end the asset purchases is a landmark step on the path towards policy normalisation after years of extraordinary stimulus, but it comes at a sensitive time as eurozone growth is slowing and threats to the region's economy are mounting.

The bank's so-called “quantitative easing” (QE) scheme, a crisis-era measure designed to pump cash into the financial system, has seen the ECB purchase some 2.6 trillion euros ($3.0 trillion) in bonds since 2015.

The programme has been credited with stoking growth and bringing the ECB closer to its inflation goal of just under 2.0 percent.

But after the 19-nation single currency area saw unexpectedly powerful growth in 2017, expansion has since fallen back, dropping to just 0.2 percent between July and September.

Attention now turns to ECB chief Mario Draghi's press conference at 1330 GMT, where he will likely seek to reassure markets that the eurozone is robust enough to withstand a string of risks, from concerns over Italy's budget and France's “yellow vests” protests to fears of a disorderly Brexit and US President Donald Trump's protectionist trade policies.

Observers say Draghi is likely to stress that despite the end of QE, the ECB will continue to support the eurozone economy through ultra-low interest rates and by reinvesting the cash from maturing bonds for a long time to come — keeping borrowing costs low.

The bank is also set to unveil its latest growth and inflation forecasts, which for the first time will include projections for 2021.

ECB to keep buying debt well into future

Even after net purchases of government and corporate bonds end, it will continue to stimulate the economy long into the future by reinvesting the proceeds from its mammoth stock of debt as it matures.

– Why reinvest? –  

The ECB originally began buying debt in 2015, saying it wanted to fight the threat of deflation and keep money flowing around the eurozone economy.

Growth has picked up since then, surging in 2017 before falling back this year, but forecasts see inflation falling short of the central bank's target of close to, but below 2.0 percent.

Continued asset purchases by the central bank are aimed as before at pushing investors' money — largely banks — out of bond markets and into lending to firms and households to power expansion and price growth.

With clouds gathering over the eurozone economy and borrowing costs for highly-indebted members like Italy rising, the ECB has signalled its monetary policy will stay loose.

– How will it work? –

The ECB will have around 200 billion euros in hand to invest over 2019 from maturing bonds, peaking at 31.6 billion in October after a trough of 5.4 billion in August.

To avoid wild swings from month to month, it said Thursday it would spread them “over the year to allow for a regular and balanced market presence.”

Each maturing bond from a eurozone member state should in principle be replaced by one from the same country — ensuring the central bank continues to parcel out its holdings in line with nations' shares in its capital.

That so-called “capital key” was recalculated this month based on the latest economic and population data, with France and Germany's shares increasing slightly while Italy's shrank.

The result: slightly more investment in German “Bunds” and less in Italian government debt.

In its statement Thursday, the central bank said any adjustment would be “gradual and will be calibrated as appropriate to safeguard orderly market conditions.”

– What could change in the scheme? –

The ECB has “chosen to retain maximum flexibility by stretching out reinvestments over 12 months, rather than over three months as it has so far,” said Frederic Ducrozet, strategist at Pictet Wealth Management.

But “it will have to figure out limitations in availability of bonds according to their duration and the country” that issued them, he noted.

There is no sign so far that the ECB will shift to buying longer-dated debt with the proceeds from its short-term bonds, mimicking the US Federal Reserve's “Operation Twist”.

But it could vary the duration of its investments by country, buying longer-term Italian bonds and shorter-term debt from Germany.

That would allow it to keep interest rates low in the places where more stimulus to economic activity is most needed — and supporting capitals like Rome that are struggling under the most crushing debt burdens.

But the move could also expose it to criticism for failing to apply the same monetary policy across the whole eurozone.

Looking to head off such attacks, ECB President Mario Draghi reiterated in October that “to finance government deficits is not part of our mandate”.

–  How long could the reinvestments last? –

The ECB said it would continue reinvesting “for an extended period of time past the date when we start raising” interest rates from historic lows.

That could be a long time, as rates are fixed at their present levels “at least through the summer of 2019”.

Across the Atlantic, the Federal Reserve kept its balance sheet at the same size for three years after ending its net asset purchases in late 2014.

(AFP/APP)

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