ECB scaling back asset buys, extension to end-2017

The European Central Bank has caught financial markets off-guard 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.

FRANKFURT • In an unexpected move, the European Central Bank (ECB) plans to cut its asset purchases to €60 billion (S$92 billion) a month from April next year, against €80 billion currently.

The asset buys will run until the end of next year, or longer if necessary, it said in a statement yesterday.

If "the outlook becomes less favourable 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 programme in terms of size and/or duration", it said.

European stocks momentarily erased gains, with the move coming as a surprise to markets expecting a steady pace for the next six months. The euro jumped to a one-month high of 1.0875 against the US dollar, but quickly retreated to 1.0753. Long-dated German bond yields hit their highest in almost a year.

The ECB has bought more than €1.4 trillion in bonds, mostly government debt, since March last year, in a bid to fight off the threat of deflation and kick-start the 19-member currency bloc still held back by the legacy of the 2009 debt crisis.

By extending bond purchases but reducing the monthly pace, the ECB could be trying to preserve its extraordinary monetary stimulus as political risks cloud the outlook for the euro area's recovery, analysts said.

Upsets including Brexit, the United States presidential 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.

"Anti-establishment movements create an atmosphere where it is very difficult for finance ministers and politicians to implement the necessary reforms, and this creates even more pressure on the ECB to gloss over the unsolved problems of the sovereign-debt crisis with a very loose monetary policy," Commerzbank Joerg Kraemer chief economist told Bloomberg TV before the decision.

"The ECB is on the hooks of the politicians."

The announcement was followed by a press conference by ECB chief Mario Draghi, who presented updated economic forecasts that for the first time extended to 2019.

Policymakers 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.

REUTERS, BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on December 09, 2016, with the headline 'ECB scaling back asset buys, extension to end-2017'. Print Edition | Subscribe