- On 13 December the ECB confirmed the end of its bond-purchase programme after almost four years.
- It would continue reinvesting maturing bonds, which softened the impact of the change on the markets.
- The end of the programme points to a more demanding environment: it is worth reviewing variable-rate debt and considering locking in part of the cost.
On 13 December 2018, the European Central Bank confirmed the end of its bond-purchase programme after almost four years, though it would continue to reinvest maturing bonds. The decision had already been announced in June, so it came as no surprise, but it marked a clear turning point in euro-area monetary policy and closed an exceptional chapter. For those who follow the course of rates, the news was less a surprise than a confirmation of what had been expected.
Over these years, bond purchases had helped keep financing costs at very low levels. Their end does not by itself change credit conditions, but it signals a change of course that is worth understanding. For those with debt, or planning to take it on, it is important to grasp what this gradual withdrawal of stimulus means and how it may affect conditions in the coming years. Understanding the mechanism makes it possible not to be surprised when instalments or financing prices start to move.
The end of an era
For almost four years, the ECB bought debt to keep financing costs low and stimulate the euro-area economy. Its confirmation of the end closed an exceptional phase of monetary policy, already announced in June.
Exceptional policies are designed for exceptional circumstances and are not meant to last indefinitely. Withdrawing them is a logical step when the situation improves, which is why it is done carefully and with prior notice. An orderly withdrawal protects both lenders and borrowers. The announcement in June and the confirmation in December allowed markets, companies and households to adjust their expectations little by little, rather than face an abrupt change. Predictability is, here too, a value in itself.
What reinvesting maturities means
Although new purchases would stop, the ECB would continue to reinvest the money from bonds as they matured. That means it would maintain its portfolio of debt rather than reduce it, which softened the impact of the change on the markets.
Put another way, the central bank stopped expanding its portfolio but did not shrink it. Each time a bond reached maturity, it used what it received to buy another. That decision kept up constant demand for debt and prevented the end of purchases from translating into a sudden tightening of conditions. It is a form of soft exit, which gives all market participants time. Even so, nobody should read it as a guarantee that conditions will not change.
Towards less cheap money
The end of the programme did not mean an immediate rise in rates, but it pointed towards a more demanding environment than in previous years. Those with variable-rate debt or needing to refinance can use the moment to review their terms and consider, with their lender or an adviser, whether it is worth locking in part of the cost.
It is wise to do the sums in advance: how much the instalment would rise if rates went up gradually, how much room the budget has to absorb it and what advantages and drawbacks fixing the rate on part of the debt would have. Each situation is different, and there is no optimal decision valid for everyone. What is common is the advantage of acting in good time, while conditions still leave room to choose. An adviser can help compare scenarios and decide without being swayed by urgency.
Changes in the monetary cycle are announced in advance; the key is to prepare while there is still room.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
