End of an era: ECB to phase out bond buying

The ECB began buying sovereign and corporate bonds in 2015 using newly-created electronic money in a scheme called "quantitative easing" or QE.

It has continued to amass debt at the rate of €60 billion a month, building up a pile worth €2.3 trillion today.

That, in turn, lowered the borrowing costs for governments and major companies, allowing them to invest cash into the European economy and helping to create jobs, growth, and mild inflation.

But the EU's economic recovery, as well as the ECB's own rules, indicate that the bank's governing council will decide to phase out the scheme, leading economists predict.

The ECB's so-called 'capital key' rule, which restricts the amount of sovereign bonds it can buy from any given euro state depending on the size of its economy, means there is just €200 billion or so of national debt left to buy.

"We expect the ECB to announce … that it will cut its monthly asset purchases from €60 billion to €30 billion as of January, with a commitment for nine months, i.e. until end-September 2018," Reinhard Cluse, the chief economist at Swiss-based UBS bank, said in a note.

"We think the ECB will leave open whether it will extend QE after September," he added.

Anatoli Annenkov, from the French-based bank Societe Generale, said "our baseline is for QE to end in September 2018".

Some analysts predicted the ECB would be more wary of causing a shock, especially in Italy, Draghi's native country, which is still struggling to finance its sovereign debt.

US bank Morgan Stanley said the ECB might change its capital key rules or switch to buying more corporate debt to taper-off the QE scheme over a longer period.

"Our work suggests that there's scope to buy beyond September 2018," it said in a note.

Economists at Dutch bank ING and at German lender Commerzbank also said the ECB is likely to err on the side of caution.

Noiselessly

"The ECB would like to announce tapering as noiselessly as possible," ING said.

Commerzbank economist Joerg Kraemer said: "The success of a relaxed monetary course is apparent not at the beginning, but when it ends … There are many risks involved".

Economic conditions aside, the predictions come after members of the ECB's 19-strong governing council dropped hints about the move earlier this month.

"I don't see the need to continue pressing on the gas pedal of monetary policy and we are doing just this if we continue to make further purchases every month," German central bank chief Jens Weidmann said in the US on 13 October.

Bank of Italy governor Ignazio Visco said: "We know at some point, we need to get out [of QE]".

If the ECB board fulfils expectations on Thursday, with Draghi saying at a press conference later in the day that the financial crisis is over, that is likely to increase the value of the euro, dampening exports.

It is also likely to lead to higher interest rates in late 2018 or in 2019, making, for instance, house purchases more expensive.

Irish debt

But Ireland, for one, thanked Draghi and the ECB for the QE programme on Thursday.

"Irrespective of what the ECB announces tomorrow, there is no doubt that Ireland has been one of the largest beneficiaries of QE," Conor O'Kelly, the head of National Treasury Management Agency, said at an event in Dublin, the Irish Times reported.

He said Ireland would have had to pay €10 billion interest on its national debt this year if the ECB had not acted, but "QE and our improved credit rating have resulted in a situation where our interest bill will soon be below €6 billion", he said.