ECB Extends QE But at a Reduced Pace

The European Central Bank expanded its quantitative-easing program to exceed 2.2 trillion euros ($2.4 trillion) by the end of 2017, buying at a reduced the monthly pace with the caveat that it can step up or prolong purchases if needed.

The Governing Council will extend the program from April at a slower speed of 60 billion euros ($65 billion) a month from 80 billion euros currently, according to a statement in Frankfurt on Thursday. ECB President Mario Draghi will hold a press conference at 2:30 p.m. in Frankfurt, where he will also outline changes to the parameters of the quantitative-easing program.

If “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,” it said in a statement.

The extension would add a total of 540 billion euros to its current 1.7 billion-euro stimulus, making the size of the program double what the ECB initially announced it in January 2015.

By extending bond purchases but reducing the monthly pace, the ECB may be trying to preserve its extraordinary monetary stimulus as political risks cloud the outlook for the euro area’s recovery. Upsets including Brexit, the U.S. election and the Italian referendum might make governments reluctant to push through the adjustments needed to turn the euro area’s cyclical recovery into a structural one.

Bonds Fall

The euro strengthened immediately after the decision, before paring gains to trade little changed at $1.0777 at 2:27 p.m. in Frankfurt. The yield on five-year German government notes rose 3 basis points to minus 0.333 percent.

Policy makers also kept the main refinancing rate at zero, the deposit rate at minus 0.4 percent and the marginal rate at 0.25 percent, as predicted by in a Bloomberg survey of economists.

“Anti-establishment movements create an atmosphere where it is very difficult for finance ministers and politicians to implement the necessary reforms, and this creates even more pressure on the ECB to gloss over the unsolved problems of the sovereign-debt crisis with a very loose monetary policy,” Joerg Kraemer, chief economist at Commerzbank in Frankfurt, told Bloomberg TV before the decision. “The ECB is on the hooks of the politicians.”

While policy makers including Draghi have said that they’ll eventually return to a more conventional monetary stance, they’ve also pledged to do what’s needed to reach their inflation goal.

At his press conference, Draghi will present updated economic forecasts that for the first time will extend to 2019. In September, the central bank forecast that inflation would accelerated to 1.6 percent in 2018.

Price growth was 0.6 percent last month, and is slowly picking up as the effect of an oil slump fades up. More than three-quarters of economists surveyed by Bloomberg predict inflation will reach the ECB’s goal of just under 2 percent before Draghi’s term expires in October 2019. Even so, he has said the outlook is reliant on maintaining the “extraordinary support of our monetary policy.”

The ECB president will announce new tweaks to the institution’s rules for QE during his press conference, as the ability to extend the program might depend on increasing the pool of eligible debt. Officials have previously made technical adjustments including raising the proportion of each bond issue they can buy, and expanding asset classes to include regional and corporate debt.

Draghi may also be quizzed on the potential fallout as the U.K. moves toward a formal request to leave the European Union, the resignation of Italian Prime Minister Matteo Renzi after a failed referendum, and the health of Italian banks. Later on Thursday, the ECB’s Supervisory Board is likely to discuss Banca Monte dei Paschi di Siena SpA’s request for more time to complete its planned capital increase.


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell