Central Banks

ECB surprises by 'tapering' its massive bond-buying program from next April

Draghi: Asset buys to increase if outlook dims

The European Central Bank (ECB) announced a continuation of the bank's generous asset-buying program on Thursday, although a reduced pace of purchases is set to start from April next year.

Current asset purchases of 80 billion euros ($86 billion) a month were due to end in March 2017, but will now be extended until at least December 2017 and will be cut to 60 billion euros a month from April 2017, the bank said in a statement. Benchmark interest rates were left unchanged.

'ECB just announced tapering'

QE decision remains flexible: Draghi

The euro zone's central bank was widely expected to announce it will continue with its massive trillion-euro bond-buying program at its meeting on Thursday, however some analysts were surprised at the details of the announcement.

"The ECB just surprised by announcing that they will extend their QE (quantitative easing) program by at least nine months, though at a smaller pace," Carsten Brzeski, a chief economist at ING, said in a note.

"Even without calling this tapering, the ECB just announced tapering. It is the combination of extending and tapering that we thought would not yet happen as it could risk an unwarranted increase in bond yields."

The ECB did add a caveat stating that if "the outlook becomes less favorable or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation" then it would increase the program again in terms of size and/or duration.

President Mario Draghi spoke at a press conference after the announcement, trying to dampen talk that the central bank was "tapering" its asset purchases. He dismissed the idea that the ECB's adjustment to the pace of its asset purchase program could be seen as easing off.

"There is no question about tapering," Draghi told the news conference. "Tapering was not discussed today," he concluded, before adding that the concept of "tapering" has several meanings and depends on who was discussing the term.

Draghi also outlined the bank's inflation forecasts over the next three years with ECB members keeping their estimate for consumer prices to grow this year by 0.2 percent. Members now expect inflation at 1.3 percent next year, marginally higher than a previous forecast for 1.2 percent back in September. 2018 inflation was revised slightly lower.

Market reaction

QE is 'in a sense open-ended': Draghi

Euro zone government bond yields pushed higher after the ECB announcement, with Italy and Spain leading the sell-off. Yields move inversely to bond prices. Long-dated German bund yields also rose, reaching their highest levels in almost a year.

Meanwhile, the euro spiked immediately after the ECB's decision on slowing down the pace of its QE program. The currency hit a 1-month high against the dollar, though had given up its all of its gains by around 1.15 p.m. London time to fall back below $1.08.

Tapering was not discussed today: ECB’s Draghi

A reduction in asset purchases is seen as a risk by some economists and has been likened to a euro zone version of the so-called "taper tantrum" seen in the U.S. in 2013. ECB members, in the run-up to the meeting, had emphasized it was "crucial" to stick with easy financial conditions particularly with the continent's stubbornly low inflation levels.

Investors are increasingly anxious about both economic and political stability in the 19-nation euro zone after Italian voters rejected constitutional reforms over the weekend and crucial general elections are due to take place in 2017.

"With QE now being extended to December 2017, we assume that the ECB will have to give new major guidance on the duration and trajectory of QE – i.e. further rounds of tapering – by 7 September or 14 December 2017," according to a note from a team of UBS economists.