The European Central Bank is to scale back the amount of bonds it buys every month from €80bn to €60bn but insisted the move did not mark the beginning of the end of its landmark quantitative easing programme.
The bank confirmed that it would buy €80bn a month of bonds until March but added it would prolong its asset purchases until the end of 2017 at the lower rate of €60bn.
The decision sparked sharp swings on financial markets. The euro initially strengthened and eurozone bonds sold off as investors interpreted the ECB’s announcement as a reduction in stimulus. But the markets later reversed course amid a focus on dovish comments by Mario Draghi, the ECB president.
Mr Draghi said the nine-month extension to the bond-buying programme sent a message that the central bank would remain active on the markets “for a long time”. He added: “Uncertainty prevails everywhere.”
The ECB has been under pressure from hawks and from German lawmakers to begin reining in its support to the single currency area’s economy. They argue that ultra-loose monetary policy hits savers and takes the pressure off indebted countries to reform their economies.
Continued loose policy in the eurozone also stands increasingly in contrast to the US, where the Federal Reserve is widely expected to raise rates next week and market rates are rising in anticipation of a shift from monetary to fiscal stimulus under president-elect Donald Trump.
Thursday’s decision means the ECB governing council will avoid having to make a tough decision on whether or not to extend QE ahead of German elections expected in September.
After an initial rise of more than 1 per cent against the dollar to a near month high of $1.0872, the euro was down 1 per cent on the back of Mr Draghi’s comments.
Mr Draghi explained the bank was reducing its monthly purchases to reflect the fact that a “deflation risk has largely disappeared”. But he said that, with inflation projected to be at only 1.7 per cent in 2019 — below the ECB’s medium-term target of just under 2 per cent — “we have to persist”.
The ECB president insisted the recalibration was not equivalent to the US move to taper QE purchases that unsettled markets in 2013. “There is no question about tapering,” he said. “Tapering has not been discussed today.”
The bank argues that its move will not reduce the quantity of bonds it eventually buys. While it is cutting the rate of purchases to €60bn a month, it has promised to buy assets for a longer period, with the result that it will own more bonds than under the other option — €80bn a month for six months — discussed at Thursday’s meeting.
The decision was not unanimously supported, with more hawkish members of the governing council voting against the package.
“The extra QE, even with tapering, easily surpasses the combined GDPs of Greece and Portugal,” noted Neil Williams, group chief economist at Hermes Asset Management. “This is more, not less, QE.”
However, Peter Chatwell at Mizuho said that by cutting monthly purchases, the ECB had announced roughly €100bn less QE in 2017 than investors had been expecting.
Bond investors also appeared less convinced than currency markets by Mr Draghi’s comments. While short-dated bonds rallied on news the ECB would lift restrictions on buying debt with low yields, longer-dated bonds moved in the opposite direction.
Bonds issued by Europe’s southern economies suffered the sharpest moves, with the yield on 10-year Portuguese bonds trading 20 basis points higher, as investors worried over the consequences of monetary stimulus being scaled back for the eurozone’s most heavily indebted economies.
“The market seems to be somewhat disappointed by the central bank’s so-called slower for longer strategy,” said Shilen Shah, strategist at Investec Wealth & Investment.
Mr Draghi said while the eurozone recovery was “moderate but firming” risks were still tilted towards the downside and the ECB could return to €80bn of purchases a month if required.
The central bank also kept its benchmark interest rate unchanged at zero and will continue to impose a fee of 0.4 per cent on deposits parked in its coffers. Both decisions were widely expected.
Mr Draghi also forecast annual eurozone growth of 1.7 per cent in 2016 and 2017 and then 1.6 per cent in 2018 and 2019 — only minimally changed from previous projections.
Inflation forecasts were also “broadly unchanged” at 1.3 per cent for 2017, 1.5 per cent in 2018 and 1.7 per cent in 2019.
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