The European Central Bank hasn’t finished surprising investors yet. Thursday it brought the end of its massive bond-buying program closer, but pushed any interest-rate increases further out. The more dovish message won, sending the euro sinking against the dollar.
The ECB said it expects to halve the pace of bond purchases to €15 billion a month in October, and then stop at the end of the year, although it will carry on reinvesting cash from maturing securities. Some economists had thought softer eurozone data and market jitters around Italy might lead the ECB to wait until July to make a decision on its quantitative-easing program.
But the bigger surprise for markets was a pledge to hold interest rates at their current levels—meaning the key deposit rate will remain in negative territory at minus 0.4%—“at least through the summer of 2019,” and possibly longer.
That guidance was more explicit than expected. The euro, which initially jumped on the news of reduced bond purchases, fell nearly two cents to $1.163. Crucially, the new formulation the ECB has given will prevent the market from getting too far ahead of itself in anticipating what policy moves will follow the end of bond purchases. In effect, for some time to come investors can only really think about whether rate increases will come later, not earlier.
That is in stark contrast to the way in which the Federal Reserve is pushing ahead with rate increases in the U.S. The gap between the Fed and the ECB is set to widen further in the coming months.
The repercussions might be felt most in the foreign-exchange market. Even if eurozone economic data bounce back after a period of weakness, they might not buoy the euro much, since it won’t necessarily translate into expectations for ECB policy. The winner out of this week’s central bank meetings could well be the dollar.