European Central Bank tapers stimulus, extends time frame
The European Central Bank extended its stimulus program until the end of the year but said beginning in April it would start reducing — or “tapering ” — the amount of euros used each month to buy financial assets.
The ECB’s program, designed to stoke inflation and boost economic growth, centers around an asset-purchase program where it buys investments, such as government bonds and corporate debt, in an effort to keep borrowing costs low. Prior to Thursday’s meeting, the ECB was buying assets at a clip of 80 billion euros per month, a program the ECB planned to end in March.
But Thursday, ECB President Mario Draghi revised the plan. The ECB extended the asset purchases to the end of December 2017. That extension was longer than many expected. But in a move investors had hoped the ECB would avoid, Draghi said that starting in April it would trim the pace of asset purchases to 60 billion euros per month.
When you add it up, the ECB will commit a total of 780 billion euros to its stimulus program next year, up from 240 billion euros had it not extended the buying beyond March 2017. Craig Erlam, senior market analyst at OANDA, dubbed the ECB’s latest move “tapering with a twist.”
Given the continued weakness of inflation and heightened political and economic uncertainty (in Europe), investors were looking for additional stimulus from the ECB, Jennifer McKeown of investment research firm Capital Economics said.
Many felt tapering of the ECB’s asset purchases — or reducing the amount of euros it devotes to the program — would be put on hold after the Italian referendum Sunday, which created fresh political uncertainty in Italy and focused a spotlight on its debt-laden banks.
Says Aberdeen Asset Management investment manager Patrick O’Donnell: “Draghi might not want to call this a taper but that’s exactly what it is. The ECB has reduced the amount of purchases and the duration of them. That’s a taper. Draghi has clearly got sandwiched between those calling for the ECB to reduce emergency levels of support and those who want more. But he’s not kidding anyone.”
The ECB left open the possibility of increasing the monthly purchases or duration if conditions warrant.