ECB trims asset buys, promises to keep borrowing costs depressed longer
The European Central Bank caught financial markets off-guard on Thursday by announcing it would trim asset buys from April next year, even as it reserved the right to increase purchases again if the euro zone’s recovery faltered.
The ECB said it would cut monthly purchases to 60 billion euros from the current 80 billion euros but extend the buys until the end of 2017. Markets had expected purchases to stay at 80 billion but only for 6 more months, suggesting a compromise between hawks and doves in the Governing Council.
The euro initially jumped to a three-week high after the announcement, but quickly retreated to be flat on the day. Bond yields across the single currency area also rose, but pared gains later.
“The bank has extended its quantitative easing program until December which is more than what the market was expecting,” said Naeem Aslam, chief market analyst at ThinkMarkets
“However, the bank is going to reduce their firepower after March and will only be purchasing 60 billion. So you can say that the bank is tapering in a more dovish way.”
European Central Bank President Mario Draghi made clear, however, that he was not offering an outright winding-down of the program.
“There was no discussion of tapering today,” he said at a news conference. “A sustained presence is also the message of today’s decision.”
The bank was also firm about the new plan could and would be reversed if required.
“If, in the meantime, the outlook becomes less favorable or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the program in terms of size and/or duration,” Draghi said, reading from the Council’s statement.
“Uncertainty prevails everywhere. .. This is the reason for that sentence in the introductory statement,” he told a news conference after a decision he called “pragmatic and flexible”.
The bank confirmed it would loosen rules for its purchases to ensure the program continued smoothly, notably broadening the maturity range for eligible securities and permitting purchases of bonds yielding below the ECB’s deposit rate.
With high risk elections looming in four of the euro zone’s five biggest economies, the ECB was fully expected to keep the asset buys going, likely fearing that cutting back prematurely could abort a still timid recovery in the euro zone.
