FRANKFURT AM MAIN: The European Central Bank on Thursday extended its mass bond-buying programme to underpin a eurozone economy rattled by political uncertainties, but surprised markets by slowing the pace of its asset purchases.
Sluggish growth, below-target inflation, the election of Donald Trump, and the resignation of Italian Prime Minister Matteo Renzi prompted most observers to predict quantitative easing would be extended beyond its March 2017 expiry date.
But the bank caught observers off-guard by saying it would reduce its bond-buying from 80 billion to 60 billion euros ($65 billion) a month from April, as well as prolonging the programme to December 2017.
Investors responded well to the move. European stock markets rose on Draghi’s signal that the euro area’s fragile economy could count on the bank’s continued support, with bonds also firming.
“By extending its asset purchases for another nine months but at a reduced monthly rate… the ECB is seemingly compromising between the more hawkish and dovish members of the Governing Council,” said analyst Howard Archer of IHS Global Insight.
Some observers have warned that any sign the bank was “tapering”—or winding down purchases —could spook bond markets, pushing up the cost of financing in the single currency area.
“There is no question of tapering,” ECB president Mario Draghi told journalists at a Frankfurt press conference.
“That’s not been discussed, it’s not even been on the table,” he added.
But economist Carsten Brzeski of ING-Diba bank said: “Today’s decisions looked, walked and quacked like tapering.”
Markets might not accept Draghi’s protestations and “give the ECB its very own taper tantrum,” he warned, referring to the rise in US treasury yields when the Federal Reserve moved to end its own QE programme in 2013.
The International Monetary Fund welcomed the ECB’s latest stimulus efforts, with spokesman Gerry Rice saying in Washington that the IMF was encouraged by the bank’s “continued willingness” to use all available tools to drive up inflation.
ECB watchers have warned that the fragile recovery in the eurozone could be undermined by any sign central bank support is on the wane.
Euro area inflation hit a two-and-a-half-year high in November at 0.6 percent, but remains far short of the central bank’s target of just below 2.0 percent.
Economic activity in the eurozone could suffer if Trump implements protectionist promises in the US made on the campaign trail.
And the 28-country European Union has worries of its own, with Britain headed for the exit door, Italy destabilised by the resignation of Renzi, and elections in the key eurozone economies of France and Germany next year.
The bank pointed towards these uncertainties on Thursday by insisting that if “the outlook becomes less favourable… the governing council intends to increase the programme in terms of size and/or duration.”
“Since uncertainty prevails everywhere, that’s the reason for this sentence,” Draghi said.
But he added that faced with political upsets this year, “markets, the financial intermediaries, proved much more resilient than people had expected”—even if the effects of a “radically new” US administration under Trump have yet to make themselves felt.
At its last meeting of the year, the ECB’s governing council on Thursday voted to keep key interest rates unchanged at record lows.
The bank also unveiled its first projections for 2019, forecasting growth of 1.6 percent and inflation of 1.7 percent.
Some ECB policymakers have hinted that with forecasts showing inflation rising steadily it is time the stimulus was withdrawn.
Banks regularly grumble that low interest rates are hurting their business, and influential German economists have repeated calls in recent weeks for the ECB to end its bond-buying.
ECB monetary policy is designed to make access to credit easier for businesses and consumers, powering a recovery with investment and consumption.
Cutting off that support too soon or too suddenly could halt the eurozone’s return to stable growth in its tracks by curtailing access to credit, the ECB fears.
Along with the language designed to reassure that bond purchases could always increase again, the bank offered a further signal on Thursday that it will not yank its support away.
In future, the ECB will be able to buy bonds with a minimum maturity of one rather than two years, Draghi said, and a rule blocking the bank from buying bonds with a yield below its deposit rate of interest—currently -0.4 percent—will be lifted.