FRANKFURT—The European Central Bank on Thursday extended its mass bond-buying program to underpin a eurozone economy rattled by political uncertainties, but surprised markets by slowing the pace of its asset purchases.
The euro retreated on the prospect of more cash being pumped into financial markets for some time to come. It was sitting around $1.06 in afternoon Asian trade, having dallied with $1.08 earlier in the week.
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 program 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 program 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 destabilized 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 favorable… the governing council intends to increase the program in terms of size and/or duration.”