Economy

European Central Bank to reduce volume of bonds under asset purchase programme

European Central Bank to reduce volume of bonds under asset purchase programme

Thursday was an interesting day for markets when the announced it would be phasing out its quantitative easing programme.

Analysts said the dollar had failed to gain after Wednesday's Fed meeting because investors may be able to see the end of its rate hike cycle, while in the euro zone monetary tightening is just beginning - a view that would be boosted if the European Central Bank signals an end to its huge asset purchases at the end of 2018.

The ECB said it would taper its bond-buying programme down to 15 billion euros a month in the fourth quarter from 30 billion euros a month now in a move that broadly met market expectations.

But it cautioned that the plan was "subject to incoming data". The ECB was the first major central bank to introduce an interest rate below zero in 2014, following the example of Sweden.

The ECB's statement came as a relief, especially after the Federal Reserve raised rates for the second time this year on Wednesday and hinted at two more hikes by the end of 2018.

The euro dropped sharply against the dollar following the announcement to trade around $1.17.

In turn, those people and firms will spend money, powering economic growth and, so the theory goes, inflation. The Fed purchased some $3.6 trillion in bonds, while the ECB will have loaded 2.6 trillion euros ($3.1 trillion) of bonds on its balance sheet, in both cases a measure of the total size of the banks' stimulus efforts.

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The ECB also downgraded its eurozone growth forecast for this year to 2.1% from 2.4% previously, while upgrading its inflation forecast to 1.7% from 1.4%, largely as a result of rising oil prices. Nevertheless, uncertainties related to global factors, including the threat of increased protectionism, have become more prominent.

The decision represents a belief in the central bank that the eurozone economy, after years of weakness and recession, "is now sufficiently robust that it can start to withdraw monetary stimulus" says The Independent.

A hawkish U.S. Federal Reserve dropped a crisis-era stimulus pledge on Wednesday while the European Central Bank had already begun rolling back support after a five-year run of economic growth.

"(The Fed's) ability to raise rates more, three or four times, that's actually good news", said Doug Cote, chief market strategist at Voya Investment Management in NY.

The rate-sensitive financial sector was the biggest percentage loser of the S&P 500, led by a 1.8 per cent decline in JP Morgan Chase shares, as US Treasury yields fell on news that the European Central Bank would be holding rates steady for longer than many investors expected.

"It's something of a surprise that the ECB is leaning so far out the window", said Holger Schmieding, chief economist at Berenberg Bank.

The council intends to maintain its policy of reinvesting the principal payments from maturing securities purchased under the APP for an extended period of time after the end of the net asset purchases, and for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.