Draghi ends ECB bond-buying era saying economy strong enough to beat risk

ECB decides to end net asset purchases by the end of 2018; Inflation seen averaging 1.7% in 2018, 2019 and 2020

Mario Draghi said the euro-area economy is strong enough to overcome increased risk, justifying the European Central Bank’s decision to halt bond purchases and close an extraordinary chapter in the decade-long struggle with financial crises and recession.

The euro fell after the central bank also pledged to keep interest rates unchanged at current record lows at least through the summer of 2019, a longer timeframe than investors had priced in. Policy makers will phase out bond purchases by the end of this year in what Draghi described as a unanimous decision.

By pushing ahead with a stimulus exit, officials are betting that the euro-area economy is robust enough to ride out an apparent slowdown amid risks including US trade tariffs and nervousness that Italy’s populist government will spark another financial crisis.

“We’ve taken these decisions knowing that the economy is in a better situation, with an increase in uncertainty,” Draghi said at a briefing in Riga, where the Frankfurt-based ECB held its annual out-of-town meeting. While the recent economic “soft patch” may last longer, that doesn’t change the view of underlying momentum, he said.

The announcement came only hours after the Federal Reserve raised U.S. interest rates for the second time this year, highlighting how a decade of easy money in Europe and America is gradually coming to an end. Still, the People’s Bank of China opted not to follow the Fed in tightened borrowing costs, and the Bank of Japan is expected to maintain its stimulus when it meets on Friday.

The euro traded 1.2 percent lower at $1.1647 at 5:12 p.m. Frankfurt time. Economists in a Bloomberg survey had expected borrowing costs would rise around the middle of next year. Almost half of them had predicted the announcement on the end of net asset purchases to be put off until July.

Draghi kept his options open. He said rates will stay at record lows for “as long as necessary” to keep inflation on a sustained path toward the goal of just under 2 percent over the medium term. The Governing Council didn’t discuss changing borrowing costs and ending asset purchases will be subject to incoming data.

“The rates will be changed depending on what is the state of the convergence process” of inflation, Draghi said. “I hope that in the next year, we will be giving an assessment of convergence that is positive and confident.”

Current risks to the economy “warrant monitoring,” but the president reiterated the view that the softening is partly due to temporary factors, and represents a pullback from the decade-high growth in 2017.

— With assistance by Fergal O'Brien, Jana Randow, Alessandro Speciale, Catherine Bosley, Jill Ward, Lucy Meakin, Zoe Schneeweiss, David Goodman, Brian Swint, Carolynn Look, Craig Stirling, Aaron Eglitis, and Iain Rogers