European Central Bank to reduce stimulus

FRANKFURT, GERMANY: The European Central Bank will ease the pace of its bond-buying stimulus programme — carefully dialing back a measure that has helped the eurozone bounce back from a debt crisis that threatened to break up the currency union.

The ECB said Thursday it would halve its bond purchases to 30 billion euros ($35 billion) per month starting in January, from 60 billion euros currently, and keep them going until at least September 2018.

The bank kept some flexibility in its statement, saying that it could increase the purchases if the 19-country eurozone endures a new economic shock.

Although the eurozone economy is growing strongly, the watchword at ECB president Mario Draghi’s news conference was caution.

He said Thursday’s decision meant the central bank was confident in the economy but “reflects that we are not there yet” and that the upswing “still relies very much on our monetary support.” He emphasised that the programme has no definite end date and in any case would not end abruptly in September. “It is certainly not going to stop suddenly,” he said.

Draghi refused to call the reduction a taper, the term used to describe the month-by-month reduction of purchases by which the US Federal Reserve exited its own bond-buying stimulus. Instead, he called it a “recalibration,” an attempt to underscore that the stimulus has no definite end date.

Strong economic growth has enabled the ECB to look toward phasing out stimulus measures in hopes that higher wages will eventually push inflation up from 1.5% to its goal of under 2%.

The withdrawal of the stimulus will have wide-ranging consequences on investors, companies and governments — one reason the ECB is moving slowly. Eventually, governments may pay more for borrowing and have less to spend, while companies that would not be profitable under normal interest rates may go out of business. But the ECB’s slow pace in removing the stimulus and raising interest rates means the impact will be slow. So savers with money in holdings such as bank deposits will endure another several years of paltry or non-existent returns.

The bond purchases were started in March 2015 amid fears that low or negative inflation would become chronic, a trap known as deflation that can hurt the economy.