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December 9, 2016

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ECB to cut asset buys in surprise move

THE European Central Bank caught financial markets off guard yesterday by announcing it would trim asset buys from April next year, even as it reserved the right to increase purchases again if the eurozone’s recovery faltered.

The ECB said it would cut monthly purchases to 60 billion euros (US$64 billion) from the current 80 billion euros but extend the buys until the end of 2017. Markets had expected purchases to stay at 80 billion euros but only for six more months, suggesting a compromise between hawks and doves in the Governing Council.

“The bank has extended its quantitative easing program until December which is more than what the market was expecting,” said Naeem Aslam, chief market analyst at ThinkMarkets.

“However, the bank is going to reduce their firepower after March and will only be purchasing 60 billion. So you can say that the bank is tapering in a more dovish way.”

But ECB President Mario Draghi made clear that he was not offering an outright winding-down of the program.

“There was no discussion of tapering today,” he said at a news conference. “A sustained presence is also the message of today’s decision.”

The ECB was also firm about the new plan could and would be reversed.

“If, in the meantime, the outlook becomes less favorable or if financial conditions become inconsistent with further progress toward a sustained adjustment of the path of inflation, the Governing Council intends to increase the program in terms of size and/or duration,” Draghi said, reading from the council’s statement.

“Uncertainty prevails everywhere ... This is the reason for that sentence in the introductory statement,” he said after a decision he called “pragmatic and flexible.”

The ECB said it would ease rules for its buying to ensure the program continued smoothly.


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