European Central Bank to take next step in tapering stimulus

The European Central Bank is expected to ratchet back its stimulus efforts again on Thursday as it gingerly phases out extraordinary support for the economy left over from the Great Recession and the euro currency union's debt crisis.

The bank's 25-member governing council is expected to cut its monthly bond-purchase stimulus to 15 billion euros ($17.4 billion) a month from 30 billion a month, on the way to ending the purchases at the end of the year.

The ECB is due to announce that step in a statement, after President Mario Draghi and other top officials pre-announced the bank's upcoming moves at their last meeting on June 14. The ECB is also expected to underline its intention to not raise its interest rates until at least the middle of 2019.

Reinhard Cluse, chief European economist for UBS, said that after the June meeting "the ECB is now essentially on autopilot." Cluse said that the ECB can phase out the bond purchases and then decide the exact timing of next year's first rate increase in the summer or fall.

The only caveat to the ECB's exit plan is a sudden downturn or crisis, in which case the purchases could be extended and any rate increases postponed.

Right now, that seems unlikely. Europe's economic upswing has moderated since the end of last year but remains robust despite concerns about trade disputes, non-euro member Britain's upcoming exit from the European Union, and spending plans by Italy's populist government.

The economy grew by a quarterly rate of 0.3 percent in second quarter. Inflation, at 2 percent, is roughly in line with the ECB's goal of less than but close to 2 percent. But when excluding volatile items like fuel and food, inflation is weak, at just 1 percent.

The ECB has managed to sketch out a withdrawal of stimulus that is so slow and predictable that it has not ruffled markets, said Carsten Brzeski, chief economist at ING Germany. "It sounds boring but it's also a success story" in that the ECB has "managed to really steer market expectations," he said.

The stimulus exit is a global trend among the rich world's major monetary authorities — the ECB, the U.S. Federal Reserve, the Bank of England and the Bank of Japan. They loosened monetary policy — lowering interest rates and pumping new money into the economy — to support the economy after the global financial crisis that deepened 10 years ago with the bankruptcy of U.S. investment bank Lehman Brothers. A crisis over debt in Greece, Ireland, Portugal, Spain, Cyprus and Italy further held back the 19 countries that use the euro as their currency.

Stimulus withdrawal should have wide-ranging effects. The low rates and bond purchases had lifted the prices of assets such as stocks and bonds. Raising rates and tightening monetary policy could make conservative holdings such as savings accounts, money market funds and certificates of deposit relatively more attractive compared for investors compared to riskier assets such as stocks. That is why the ECB is moving carefully to return rates to more normal levels.

The ECB's purchase of government and corporate bonds from banks is a way of pushing newly created money into the banking system, and hopefully into the economy. The aim was to raise inflation from dangerously low levels near zero and help banks make more loans available to businesses to boost growth.

Low interest rate benchmarks had the same goal. The ECB's lending rate to banks is at a record low of zero, compared with the Fed's rate in a range of 1.75-2.0 percent. The Fed has raised rates several times already, while the ECB has been much slower to withdraw stimulus because the economic recovery in Europe has been more sluggish.

While the bank reins in the stimulus, much of the recent media reports on the bank have focused not on monetary policy, but on whom European leaders will choose to succeed Draghi after his term expires in October 2019. The German business publication Handelsblatt has reported that German Chancellor Angela Merkel plans to focus on pushing for a German head of the European Commission instead of seeking the top ECB job for German national central bank head Jens Weidmann, who had been considered a leading contender. Other names often mentioned in speculation are French central bank head Francois Villeroy de Galhau, Finnish central bank head Olli Rehn, former Finnish central banker Erkki Liikanen, and Irish central bank head Philip Lane.