Understanding the European Central Bank’s Asset Purchase Program and Interest Rate Hike

On April 14th, it was reported that the European Central Bank’s regulatory committee, Wen Shi, stated that the European Central Bank can completely stop reinvesting its asset purchase program this year. The interest rate hike in May will be between 25 and 50 basis points, and the scale of the hike will largely depend on the April core inflation rate. (Golden Ten)

European Central Bank Regulatory Commission Wen Shi: The European Central Bank can completely stop reinvesting its asset purchase program this year

The European Central Bank (ECB) has been actively employing measures to stimulate the eurozone’s economy and increase inflation. One of its key tools is the asset purchase program, which involves buying government and corporate bonds. However, the ECB has recently signaled its intention to halt this program, which has raised questions about the impact on the economy and the prospects of an interest rate hike.

What is the ECB’s Asset Purchase Program?

The ECB’s asset purchase program, also known as quantitative easing, aims to increase the money supply and boost lending by injecting cash into the financial system. The ECB buys government and corporate bonds from banks and other financial institutions, which gives these institutions more cash to lend or invest elsewhere. This, in turn, should help stimulate economic activity.
The program was launched in 2015 and has been expanded over time. As per the latest reports on April 14th, the ECB is considering ending the program this year, possibly by September, which would put an end to a total of €2.55tn ($3.20tn) in bond purchases. This decision is largely due to the improvement in the eurozone’s economic growth, which is expected to be around 2.5% in the first quarter of 2018.

What Are The Prospects Of An Interest Rate Hike?

The ECB currently has its deposit rate set at -0.4%, which means banks have to pay to park their money at the central bank. The ECB has signaled that it may increase rates soon, especially considering the rise in core inflation, which tracks prices excluding energy and food. The April core inflation rate will play a crucial role in determining the scale of the expected interest rate hike in May.
It is expected that the interest rate hike in May will be between 25 and 50 basis points, or 0.25% to 0.5%. The size of the hike will depend largely on the April core inflation rate. The ECB has signaled that they will gradually increase interest rates over time to reach their target rate of 2% inflation.

What Are The Impacts Of These Potential Changes?

If the ECB does end the asset purchase program this year, it could have significant impacts on the financial markets. The program has been instrumental in keeping bond yields low and supporting the prices of a range of assets, including equities, property, and high-yield corporate bonds. This has helped boost global markets over the past few years, so an end to the program could cause some volatility in the markets.
On the other hand, an interest rate hike could affect the creditworthiness of companies, as higher interest rates would mean higher borrowing costs. This could lead to a slowdown in investment and economic growth. However, the interest rate hike would also signify a strengthening of the eurozone’s economy, which could lead to an increase in investor confidence and help boost the markets.

Conclusion

The European Central Bank’s asset purchase program and interest rate hike decisions have significant impacts on the economy and financial markets. The potential end to the asset purchase program this year and an interest rate hike in May are indicative of the ECB’s confidence in the eurozone’s economic growth but could also pose some challenges for investors, businesses, and consumers.

FAQs

1. Will the end of the ECB’s asset purchase program lead to a recession in the eurozone?
There is no clear answer to this question. While the end of the program may cause some volatility in the markets, it could also signify an overall improvement in the eurozone’s economic prospects. However, businesses and consumers may face some challenges due to the potentially higher borrowing costs.
2. Is the ECB’s decision based solely on the April core inflation rate?
The April core inflation rate is a significant factor in the ECB’s decision, but it is not the only one. The ECB considers multiple economic indicators and factors before making any policy changes.
3. How can investors prepare for the potential changes in the ECB’s policy?
Investors should stay informed about the latest developments in the European economy and financial markets and broaden their investment portfolios to include alternative assets. They should also consult with their financial advisors to determine the best strategies to mitigate any potential risks and take advantage of any opportunities.