On Thursday June 14th, the European Central Bank (ECB) decided to end its quantitative easing (QE) at the end of the year. While this news wasn’t a surprise, the timing of the first rate hike was slightly different from to market expectations. Debt purchases under the QE launched in 2015, which totaled EUR 2,550 billion, will be reduced from EUR 30 billion per month to EUR 15 billion between October and December, and then will finally cease. Indeed, the ECB Board of Governors plans to keep interest rates at their current level until – at least – the end of summer 2019 and “as long as necessary” to ensure that inflation remains in line with its objective. As a reminder, the refinancing rate, the main instrument of monetary policy, remains fixed at zero, the deposit facility rate at -0.4%, and the marginal lending facility rate at 0.25%.
At the end of the day, the ECB will adopt a “patient” and “gradual” approach when raising interest rates to accompany the recovery from inflation in the Eurozone. Several options are available to the Frankfurt-based institution. On the one hand, the date of the first interest rate hike could very likely be at the Monetary Policy Committee on September 12th or October 24th of 2019. On the other hand, the first rate hike could (i) only affect the deposit facility rate by 15 bps in order to bring the rate corridor back to its original configuration, i.e., a 25 bps spread between each of the three rates or (ii), the three rates at the same time and therefore a first hike of the refinancing rate, thus withdrawing it of the zero lower bound it was fixed on March 2016.
Julien Moussavi, Head of Economic Research – Sources: Beyond Ratings, ECB