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October 27, 2017

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ECB to cut bond buying to US$35b per month

THE European Central Bank will ease the pace of its bond-buying stimulus program — dialing back a measure that has supported the eurozone economy’s recovery from a debt crisis that threatened to break up the currency union.

The ECB said yesterday it would reduce its bond purchases to 30 billion euros (US$35 billion) per month starting in January, from 60 billion euros now. The purchases would continue at least until September 2018.

The ECB kept some flexibility in its statement, saying that it could increase the purchases if the 19-country eurozone endures a new economic shock.

Steady growth has enabled the ECB to look toward phasing out extraordinary stimulus measures, in hopes that higher wages will eventually push inflation up from 1.5 percent to its goal of just under 2 percent.

The withdrawal of the stimulus will have wide-ranging consequences on investors, companies and governments — one reason the ECB is moving slowly. Eventually, governments may pay more for borrowing and have less to spend, while companies that would not be profitable under normal interest rates may go out of business. But the ECB’s slow pace in removing the stimulus and raising interest rates means the impact will be slow. So savers with money in conservative holdings such as bank deposits will endure another several years of paltry or nonexistent returns.

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. Inflation has responded only slowly. The ECB must think about ending the program in part because it could run out of eligible government and corporate bonds to purchase. The program has also been opposed by a minority of stimulus skeptics on the governing council.

The bank says it has room to end the stimulus as the economy continues to grow faster than expected. The 19 countries that share the euro currency saw their combined economy grow 2.3 percent in the second quarter compared with the same quarter the year before. The crisis over high debt in countries like Italy, Greece, Spain, Portugal, Ireland and Cyprus has eased.


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