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EDITOR IN CHIEF- ABDULLAH BIN SALIM AL SHUEILI

ECB to scale back stimulus from 2018

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FRANKFURT: The European Central Bank, taking its biggest step yet in weaning the euro zone economy off years of stimulus, announced on Thursday it was cutting back on its lavish monthly purchase of euro zone bonds. Hedging its bets, however, it also extended the bond-buying programme’s lifespan. The bank cut bond buys in half to 30 billion euros a month, taking comfort in an economic recovery now in its fifth year and moving in sync with peers like the US Federal Reserve and the Bank of England, as they also prepare to tighten policy.


Yet, the ECB remains bothered by low inflation, so it twinned the cut with a nine month extension of the programme, opting to buy fewer bonds but for a longer period to reassure investors it will provide accommodation for a long time.


Indeed, the ECB even maintained its option to increase or extend the bond buying programme, an apparent victory for policy doves who argued that they should not commit to ending the buys since possible euro gains could exacerbate weak inflation.


Designed nearly three years ago to fight off the threat of deflation, the bond purchase scheme has cut funding costs, revived borrowing and lifted growth, even if it ultimately failed to raise inflation back to the ECB’s target of almost 2 per cent.


“If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the asset purchase programme in terms of size and/or duration,” the ECB said in a statement.


The ECB added that its main refinancing operations and the three-month longer-term refinancing operations will continue to be conducted as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the last reserve maintenance period of 2019.


Interest rates were left unchanged as expected and the ECB reaffirmed its guidance to keep them unchanged until well after its bond buys end.


Analysts ahead of the meeting expected the bond purchases extended by six months at 40 billion euros per month while sources close to the discussion said that the internal debate was focusing on a nine month extension with volumes cut to somewhere between 25 billion and 40 billion euros. Attention now turns to ECB President Mario Draghi’s news conference later, where he is likely provide further clues about the bank’s policy shift. — Reuters


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