ECB extends bond-buying at reduced pace until end of 2017

The European Central Bank, (ECB) is pictured in Frankfurt.
The European Central Bank, (ECB) is pictured in Frankfurt. PHOTO: AFP

FRANKFURT (BLOOMBERG) - The European Central Bank extended its quantitative easing program to the end of 2017, reducing the monthly pace with the caveat that it can step up asset purchases or prolong them if needed.

The Governing Council will slow down the program in April to a monthly speed of 60 billion euros (S$92.3 billion) from 80 billion euros currently, according to a statement in Frankfurt on Thursday.

If "the outlook becomes less favorable or if financial conditions become inconsistent with further progress toward a sustained adjustment of the path of inflation, the Governing Council intends to increase the program in terms of size and/or duration," it said in a statement.

By extending bond purchases but reducing the monthly pace, the ECB may be trying to preserve its extraordinary monetary stimulus as political risks cloud the outlook for the euro area's recovery. Upsets including Brexit, the US election and the Italian referendum might make governments reluctant to push through the adjustments needed to turn the euro area's cyclical recovery into a structural one.

The euro strengthened immediately after the decision, before paring gains to trade little changed at US$1.0747 at 2 p.m. in Frankfurt. The yield on five-year German government notes rose 5 basis points to minus 0.32 per cent.

Policy makers also kept the main refinancing rate at zero, the deposit rate at minus 0.4 per cent and the marginal rate at 0.25 per cent, as predicted by in a Bloomberg survey of economists.

While policy makers including ECB chief Mario Draghi have said that they'll eventually return to a more conventional monetary stance, they've also pledged to do what's needed to reach their inflation goal.

At a press conference later, Mr Draghi warned that the ECB's stimulus push might not be the last as it strives to reach its inflation goal.

"The intention of the monetary-policy decisions is to maintain the extraordinary degree of accommodation in place," he told reporters. 

The ECB's fresh action comes amid concern that the euro area's gradual economic recovery risks being derailed as political uncertainties cloud the outlook. Mr Draghi and his colleagues have frequently stressed that the upturn is largely reliant on continued monetary easing as governments fail to play their part with economic reforms.