ECB Keeps Its Options Open


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What's going on?

The European Central Bank (ECB) met on Thursday, but it held back from telling investors any new information about its crucial bond buying program. Everyone’s attention is now focused on its December meeting.

What does this mean?

The ECB has been directly buying the bonds of European countries and companies, which pushes bond prices up and interest rates (a.k.a. bond “yields”) down (click here for a reminder of how that dynamic works). As interest rates go down, it becomes cheaper for European companies to borrow, and in turn spend, money, which helps boost the economy. However, this bond buying program is scheduled to end in March. While it will almost certainly be extended, investors are still unsure if the amount of bonds bought each month will change. For now, the ECB is keeping everyone in suspense.

Why should I care?

For the market: Investors are wary of changes to the ECB’s bond buying program.
If the ECB were to reduce the amount of bonds it purchases each month, it’s very likely that interest rates would go up – which could reverse some of the supportive economic influences that the ECB has created. While this might be good for the value of the euro (why? Click here), it would likely create headwinds for European stocks (e.g. a stronger currency would make it harder for European companies to sell goods overseas).

The bigger picture: The ECB’s bond buying scheme is working… kind of.
Europe’s economy looks to be stronger than it’s been in previous years. The unemployment rate is at a 5-year low, and prices are no longer falling (e.g. deflation, which is usually bad, has been reversed). The situation is far from ideal, but it’s all adding up to what the ECB calls a “continued but steady recovery.”

Originally posted as part of the Finimize daily email.

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