At its meeting on 13 December, the Governing Council of the European Central Bank (ECB) agreed to discontinue the net asset purchases under the asset purchase programme (APP) in December 2018. Consequently, the stock of acquired assets will not grow any further after that point in time. However, the reinvestment of principal payments from maturing securities will keep the stock constant at what will then be around €2.6 trillion.

The ECB Governing Council used its meeting to decide on the technical parameters for the reinvestment of principal payments from maturing securities and also expanded on its forward guidance, as articulated by ECB President Mario Draghi at the subsequent press conference: “Accordingly, [the ECB Governing Council] intend[s] to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when [the Governing Council] start[s] raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.”

Technical parameters for APP reinvestments

As the ECB explained in a subsequent press release, appropriate reinvestments will be made in order to maintain the size of the cumulative net purchases under each constituent programme of the APP, i.e. the public sector purchase programme (PSPP), the asset-backed securities purchase programme (ABSPP), the third covered bond purchase programme (CBPP3) and the corporate sector purchase programme (CSPP), at their respective levels as at the end of December 2018.

As a rule, redemptions from the PSPP will be reinvested in the jurisdiction in which principal repayments are made. However, the portfolio allocation across jurisdictions will continue to be adjusted with a view to bringing the share of the PSPP portfolio into closer alignment with the respective national central banks’ subscription to the ECB capital key. This key determines what percentage share of the ECB’s capital a national central bank must contribute. It is based on each country’s share of total EU population and GDP, and its most recent adjustment will enter into force on 1 January 2019.

To ensure that the reinvestments do not impair the proper functioning of the market, the ECB Governing Council intends to distribute the reinvestment of principal redemptions over the year. Public sector securities with a yield to maturity below the interest rate on the ECB’s deposit facility will continue to be purchased only in exceptional cases.

Key interest rates left unchanged

At its meeting, the Governing Council left the key ECB interest rates unchanged. Thus, the interest rate on the main refinancing operations stands at 0.0%, the interest rate on the marginal lending facility at 0.25%, and the deposit facility rate at -0.40%. “[The Governing Council] expect[s] [the key ECB interest rates] to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term,” said Mr Draghi.

Domestic demand underpinning economic expansion

On the topic of overall economic development, Draghi indicated that incoming information was weaker than had been expected. He explained that this reflected softer external demand but also some country and sector-specific factors, though the underlying strength of domestic demand continued to underpin the euro area expansion and gradually rising inflation pressures.

According to the most recent Eurosystem staff projections from December 2018, the experts anticipate real GDP growth in the euro area of 1.9% this year, 1.7% in 2019 and 2020, and 1.5% in 2021. This means that, compared with the September projection, their expectations for 2018 and 2019 have each been revised downwards by 0.1 percentage point.

With regard to the rate of inflation in the euro area, the staff forecast an annual average rise in the Harmonised Index of Consumer Prices (HICP) of 1.8% in 2018, 1.6% in 2019, 1.7% in 2020, and 1.8% in 2021. Compared with the September projections, their expectations for 2018 were revised upwards by 0.1 percentage point, while their expectations for 2019 were revised downwards by 0.1 percentage point.