ECB surprises by failing to extend QE deadline; cuts euro zone growth forecasts

The European Central Bank (ECB) surprised markets on Thursday by failing to extend the deadline for its trillion-euro bond-buying program.

Expectations were high the central bank would prolonging the program beyond its current deadline of March 2017, but it did not do so.

The euro zone STOXX 50 index fell on the news, but the euro rose slightly against the U.S. dollar to near a two-week high. The yields on German benchmark 10-year Bunds turned slightly less negative. 

ECB President Mario Draghi said the central bank did not discuss extending the program at its latest monetary policy meeting. 

"Our program is effective and we should focus on its implementation," he said at his regular post-decision media conference on Thursday. 

The ECB held its key interest rates unchanged on Thursday, as expected. The rate on the ECB's marginal lending facility stands at 0.25 percent, with the rate on the deposit facility at -0.4 percent. The fixed rate on the ECB's main refinancing operations remains at zero. The ECB last moved rates in March, when it cut the rate on the marginal lending facility by 5 basis points. 

Despite the ECB's monetary stimulus program - which includes low or negative rates, low-interest loans to banks and a trillion-euro bond-buying program - the euro zone's economic growth and inflation rate remain stubbornly low.  

On Thursday, the central bank raised its economic growth outlook for the euro zone slightly for 2016, but cut it for 2017 and 2018. It now sees growth in the 19-country bloc averaging 1.7 percent this year, having previously forecast 1.6 percent growth. It forecasts expansion of 1.6 percent in 2017 and 2018, down from its June forecast of 1.7 percent in both years. 

The central bank's 2016 inflation forecast was held at 0.2 percent and its 2018 estimate stayed at 1.6 percent. However, it cut its 2017 forecast to 1.2 percent from 1.3 percent. 

"We will preserve the very substantial amount of monetary support that is embedded in our staff projections and that is necessary to secure a return to inflation," Draghi said in his statement. 

Draghi said the ECB's monetary stimulus would boost euro zone economic growth by 0.6 percent over the forecast horizon and inflation by 0.4 percent. 

The euro zone's economy is seen being hampered by sluggish global demand, due to several factors, including the U.K.'s vote in June to quit the European Union, he added.

The ECB's inflation forecasts are particularly important, as the central bank has a single mandate to target price stability. It aims for inflation of close to, but below 2 percent over the medium term. Average inflation in the bloc, based on non-harmonized national consumer price indexes fell below 1.75 percent in March 2013, kept on falling, and is currently around 0.2 percent. 

Prior to Thursday's announcement, there was speculation the ECB might extend the deadline on its quantitative easing program. The ECB has extended the deadline before, upped its monthly asset-purchases of securities to 80 billion euros ($90 billion) from 60 billion euros and expanded the program to include corporate bond-buying. 

Focus has now shifted to whether the ECB will announce an extension to the program later this year. 

"We think it will need to announce further policy stimulus before long,"Jennifer McKeown, senior European economist at Capital Economics, said in a report on Thursday. 

"We suspect that it will announce a six-month extension of the Asset Purchase Programme (APP) in December if not before and it might yet need to increase the pace of purchases too," she later added. 

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