Daily Management Review

Its Massive Bond-Buying Program Extended By ECB Even As It Unveils Plan To Cut Them


10/26/2017




Its Massive Bond-Buying Program Extended By ECB Even As It Unveils Plan To Cut Them
While extending the length of time that its stimulus program runs, the level of bonds it purchases every month was cut by the European central Bank (ECB), it decided on Thursday.
 
Starting in January, from 60 billion euros, its purchases will fall to 30 billion euros ($35 billion). until at least September of next year, it will extend its monetary stimulus program, the central bank said.
 
In the years since the global financial crash and the euro zone sovereign debt crises, the central bank has remained ultra-accommodative. U.S.-style quantitative easing (QE) — buying assets to stimulate lending — which is used to stoke inflation and boost the economy, has been introduced by the ECB in addition to record low interest rates.
 
"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."
 
In order to reduce its monetary stimulus — known as tapering, this is the most significant move the ECB has taken. However, its monetary policy will adapt to the new environment, if financial conditions or the economic outlook change, the central bank noted. The bank would continue to re-invest the proceeds it gets from buying debt in a "massive" way, said ECB President Mario Draghi.
 
Set to remain in place "well past" the monetary stimulus program, the bank's main interest rates were unchanged.
 
While also acknowledging that the economic outlook and the path of inflation remain conditional on continued support from monetary policy, this recalibration of asset purchases reflected growing confidence in reaching the bank's inflation target, Draghi explained.
 
The decision wasn't unanimous, Draghi told reporters on Thursday. "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."
 
As traders were expecting a more hawkish tone from the central bank, the euro turned lower on the news. Down by 0.5 percent for the session, at 1:00 p.m. London time, the currency was trading 1.1756 against the dollar.
 
"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.
 
A turning point for the European Central Bank was October, highlighted many market players. Extensive details of how the central bank will start reducing its monetary stimulus in the euro zone had been expected by them.
 
As inflation remains below its target of "close but below 2 percent", announcing an exit from monetary stimulus is difficult for the central bank.
 
(Source:www.cnbc.com)






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