The European Central Bank (ECB) will ease the pace of its bond-buying stimulus program — 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 on Thursday said it would halve its bond purchases to 30 billion euros (US$35 billion) per month starting in January, from 60 billion euros currently, and keep them going until at least September next year.
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 the 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 emphasized that the program has no definite end date and 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 bond-buying stimulus.
Instead, he called it a “recalibration,” an attempt to underscore that the stimulus has no definite end date.
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 and be difficult to escape.
The withdrawal of the stimulus will have wide-ranging consequences on investors, companies and governments — one reason the ECB is moving slowly. Eventually, governments might pay more for borrowing and have less to spend, while companies that would not be profitable under normal interest rates could go out of business.
However, the ECB’s slow pace in removing the stimulus and raising interest rates means its influence will be slow and savers with money in conservative holdings, such as bank deposits, will endure several more years of paltry returns.
The pace of stimulus reduction “illustrates that the ECB wants to start the exit as cautiously as possible, ideally without seeing the euro appreciate or bond yields increase,” ING Germany chief economist Carsten Brzeski.
The market seemed to agree and the euro traded 0.9 percent lower on the day at US$1.1709 at 1:51pm.
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