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The European Central Bank (ECB) decided Thursday to cut the level of bonds it purchases every month, but extend the length of time that its stimulus program runs.
Its purchases will fall to 30 billion euros ($35 billion) from 60 billion euros, starting in January. The central bank said it will extend its monetary stimulus program until at least September of next year.
The central bank has remained ultra-accommodative in the years since the global financial crash and the euro zone sovereign debt crises. As well as record low interest rates it also introduced U.S.-style quantitative easing (QE) — buying assets to stimulate lending — which is used to stoke inflation and boost the economy.
"Today's decision is a sea change but a very gentle one; not a big-bang u-turn in ECB monetary policy," Carsten Brzeski, a chief economist at ING, said in a research note.
"In fact, the QE recalibration the ECB has announced illustrates that the ECB wants to start the exit as cautiously as possible, ideally without seeing the euro appreciate or bond yields increase. It is a very dovish tapering."
This is the most significant move the ECB has taken to reduce its monetary stimulus — known as tapering — in the 19-member region. However, the central bank noted that if financial conditions or the economic outlook change, its monetary policy will adapt to the new environment. ECB President Mario Draghi said the bank would continue to re-invest the proceeds it gets from buying debt in a "massive" way.
The bank's main interest rates were unchanged and are set to remain in place "well past" the monetary stimulus program.
At a subsequent press conference, Draghi explained that this recalibration of asset purchases reflected growing confidence in reaching the bank's inflation target, while also acknowledging that the economic outlook and the path of inflation remain conditional on continued support from monetary policy.
Draghi told reporters on Thursday that the decision wasn't unanimous. "The discussion ranged from consensus on general principles to a large majority on (certain decisions)," he said.
"We didn't discuss really the composition (of the program)," Draghi said about the bank's detailed plans to buy corporate and government bonds. "The only thing I can say about that is that we will continue buying sizable quantities of corporate bonds in the program."
Draghi also told CNBC at the press conference that the bank continues to have all the necessary tools available.
The euro turned lower on the news as traders were expecting a more hawkish tone from the central bank. The currency was trading 1.1756 against the dollar, down by 0.5 percent for the session, at 1:00 p.m. London time.
"The ECB's decision to scale back its asset purchase program from January was broadly in line with the consensus expectation, but its failure to provide a firm end-date was perceived as slightly dovish by investors," Jessica Hinds, European economist at Capital Economics, said via email.
Market players highlighted October as a turning point for the European Central Bank. They had expected nothing less than details on how the central bank will start reducing its monetary stimulus in the euro zone.
Announcing an exit from monetary stimulus is difficult for the central bank, as inflation remains below its target of "close but below 2 percent." There's also internal differences within the bank.
Some members believe that it is still too early to relax the stimulus program, but others are of the opinion that rates have been low for a very long time. Jens Weidmann, governor of the German central bank and one of the most hawkish members of the ECB, said in Washington earlier this month: "I don't see the need to continue pressing on the gas pedal of monetary policy and we are doing just this if we continue to make further purchases every month."