ECB Surprises by 'Tapering' its Massive Bond-Buying Program from Next April

Posted by jbrumley on December 8, 2016 8:48 AM

By Sam Meredith, CNBC

The European Central Bank (ECB) announced a continuation of the bank's generous asset-buying program on Thursday, although a reduced pace of purchases is set to start from April next year.

Current asset purchases of 80 billion euros ($86 billion) a month were due to end in March 2017, but will now be extended until at least December 2017 and will be cut to 60 billion euros a month from April 2017, the bank said in a statement. Benchmark interest rates were left unchanged.

The ECB was widely expected to announce it will continue with its massive trillion-euro bond-buying program at its meeting on Thursday, however some analysts were surprised at the details of the announcement.

"The ECB just surprised by announcing that they will extend their QE (quantitative easing) program by at least nine months, though at a smaller pace," Carsten Brzeski, a chief economist at ING, said in a note.

"Even without calling this tapering, the ECB just announced tapering. It is the combination of extending and tapering that we thought would not yet happen as it could risk an unwarranted increase in bond yields."

In what is set to be the most closely watched ECB meeting in several months, President Mario Draghi is expected to talk at a press conference at 1.30 p.m. London time. A reduction in asset purchases is seen as a risk by some economists and has been likened to a euro zone version of the so-called "taper tantrum" seen in the U.S. in 2013.

Euro zone government bond yields pushed higher after the ECB announcement, with Italy and Spain leading the sell-off. Yields move inversely to bond prices. Long-dated German bund yields also rose, reaching their highest levels in almost a year.

Meanwhile, the euro spiked immediately after the ECB's decision on slowing down the pace of its QE program. The currency hit a 1-month high against the dollar, though had given up its all of its gains by around 1.15 p.m. London time to fall back below $1.08.

ECB members, in the run-up to the meeting, had emphasized it was "crucial" to stick with easy financial conditions particularly with the continent's stubbornly low inflation levels. Investors are increasingly anxious about both economic and political stability in the 19-nation euro zone after Italian voters rejected constitutional reforms over the weekend and crucial general elections are due to take place in 2017.

Courtesy of CNBC

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