There will be “big, bad outcomes” if the European Central Bank prematurely reduces its bond-buying program designed to support the economy, according to Bridgewater Associates founder Ray Dalio and his colleagues.
Dalio and his colleagues Bob Prince, Karen Karniol-Tambour and Melissa Saphier sent a note to clients on Friday titled: “Tapering by the ECB would be very bad for Europe’s economy, its assets, and its unity.”
Business Insider obtained a copy of the note. In it, Bridgewater estimates the impact of the ECB reducing bond purchases.
“The question of what the ECB monetary policy past March will look like is growing in importance as we move closer to that date,” the note said. “Though Mario Draghi understandably side-stepped the question, it is the growing elephant in the room.”
Bridgewater estimates that a reduction of the ECB’s bond purchases to zero over a year would reduce gross domestic product growth by about 1%. A taper would be the same as raising interest rates by about 1.25%, according to the note. The ECB would usually only raise interest rates when it’s trying to contain a fiery economy and inflation.
If the ECB tapers its bond buying, the euro would gain by between 5% to 10%, and inflation would fall by about 0.3% from about 1% today, the note said.
“These figures are approximate,” the note said. “Nonetheless, it’s clear that it would lead to big, bad outcomes.”
Earlier this month, Bloomberg reported that the ECB would probably wind down its €80 billion-a-month bond-buying program before the end of the overall stimulus package known as quantitative easing. The report unnerved investors, who had expected that the ECB would continue doing all it takes to combat low inflation.
But on Thursday, ECB President Mario Draghi said the bank has not discussed extending the easing program beyond the March 2017 end point.
He said the bank’s “decisions in December” will give clarity on what it plans to do in the coming months, leaving investors in suspense until then. The euro slumped to the lowest level since March as Draghi spoke, suggesting that investors saw the possibility of a QE extension announcement in December.
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