In major shift, ECB to slash bond buys but extend stimulus; euro drops

The European Central Bank said it would cut asset purchases to 30 billion euro from 60 billion euros starting January while also extending the scheme by nine months to September.
The European Central Bank said it would cut asset purchases to 30 billion euro from 60 billion euros starting January while also extending the scheme by nine months to September.PHOTO: AFP

FRANKFURT (REUTERS) - The European Central Bank extended its bond purchases at a reduced pace on Thursday (Oct 26), taking its biggest step yet in weaning the euro zone economy off protracted stimulus.

The ECB said it would halve asset purchases to 30 billion euros (S$48 billion) from 60 billion euros starting January while also extending the scheme by nine months to September.

On currency markets, the euro fell by 0.4 per cent against the US dollar to US$1.1760 in the wake of the statement.

Designed nearly three years ago to stave off deflation, the bond purchase scheme has cut funding costs, revived borrowing and lifted growth, even if it ultimately failed to raise inflation back to the ECB's target of almost 2 per cent.

The ECB also said that asset buys could be raised once again if the outlook worsened and reaffirmed its guidance for interest rates to stay at their current level until well past the end of its net asset purchases.

"If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme in terms of size and/or duration," the ECB said in a statement after a regular policy meeting.

Even as asset buys were adjusted, the ECB kept all of its interest rates unchanged, including its deeply negative deposit rate.

The main refinancing rate, which determines the cost of credit in the economy, was unchanged at 0.00 per cent while the rate on bank overnight deposits, which is currently the ECB's primary interest rate tool, was left at -0.40 per cent, as expected.

The emergency overnight borrowing rate for banks remained at 0.25 per cent.

Attention now turns to ECB President Mario Draghi's press conference, due to start at 1230 GMT.