The European Central Bank (ECB) is to extend its stimulus programme to September next year but cut asset purchases by half.
Financial markets were expecting eurozone policymakers to signal at least a gradual withdrawal of quantitative easing, with the Bank’s bond-buying providing more than $2tn in financial support to economic recovery to date.
The ECB, led by its president Mario Draghi, said it would maintain asset purchases at their current level of €60bn per month until December.
But it said the scheme would be cut to €30bn monthly during 2018 until September at least.
Image: The euro lost some strength against the pound and dollar after the decision was announced
Its main interest rates were left unchanged at their record lows.
The Bank has been buying corporate and government bonds with the twin aims of using the proceeds to drive economic activity and therefore raise inflation.
While inflation has remained stubbornly low at 1.5%, economic growth has gained momentum this year to an annual rate above 2% in the second quarter, leaving the Bank under pressure to roll back on its support for lending.
The announcement saw the euro tumble against both the dollar and sterling while stock markets gained.
That was because the decision signalled that the era of cheap money – which has helped drive stock indices to record levels – was not over yet and was seen as diminishing the chance that the ECB would raise interest rates next year.
Image: European Central Bank (ECB) President Mario Draghi
At a news conference to explain the ECB governing council’s decisions, Mr Draghi said inflation remained “muted”.
“Therefore an ample degree of monetary stimulus remains necessary for underlying inflation pressures to build up,” he told reporters.
ING chief economist Carsten Brzeski said: “Today’s decision is a sea change but a very gentle one; not a big-bang u-turn in ECB monetary policy.
“In fact, the QE recalibration the ECB has announced illustrates that the ECB wants to start the exit as cautiously as possible, ideally without seeing the euro appreciate or bond yields increase.”
Neil Wilson, senior market analyst at ETX Capital, said there was a chance the Bank could have stoked a stronger euro through its next move and so-called taper tantrum.
“A dovish taper is exactly what Draghi wants and he should be chuffed so far with the euro falling – markets had been well shepherded to expect this course.”