ECB extends QE programme but at a tapered pace

The European Central Bank on Thursday decided to extend its quantitative easing programme by nine months but at a tapered pace.

The central bank will continue its monthly asset purchases at €80bn until March 2017 before lowering the programme to €60bn per month until the end of December.

Analysts were expecting the ECB to extend the programme for six months amid inflationary pressures and heightened political uncertainty.

The ECB decided, as anticipated, to keep benchmark interest rates, the marginal lending facility rate and the deposit facility rate unchanged at 0.00%, 0.25% and -0.40% respectively.

European stocks initially declined but picked up once the ECB's action was properly digested. The euro, which at first rose on the news, fell 1.38% against the dollar at $1.0605 and declined 0.96% versus the pound at £0.84355.

Barclays said: "We believe the fundamental reason for reducing the pace of monthly purchases is that €80bn in asset purchases is too high, given the improving macroeconomic backdrop, especially as risks of 'deflation and de-anchoring expectations' have become more of a tail event relative to the first quarter of 2016.

"In fact, when the asset purchase programme was boosted from €60bn to €80bn in the first quarter of 2016, it was presented by the ECB as frontloading QE. Importantly, the reason why we still expect QE to continue in 2018 is fundamentally because the inflation dynamics are not yet self-sustaining, so the euro area economy will continue to require a high degree of monetary easing, albeit at a lower pace than currently."

ECB President Mario Draghi said if the outlook was to become “less favourable” or financial conditions worsened the Governing Council would consider increasing the quantitative easing programme in size or duration.

In a press conference following the announcement, Draghi tried to reassure the market that the ECB’s move should not be considered as tapering.

“The immediate reaction to the news was disappointment, since he also cut the monthly purchase level, but markets focused on the longer timeframe, and then got even more excited when the bank declared it would buy assets yielding below its deposit rate,” said IG’s Chris Beauchamp.

“He might have cut the amount of alcohol in the punch bowl, but the punch will be served for longer, while the choice of tipple on offer has been widened as well.”