Euro slides after ECB announces plans to halve stimulus package from next year

Euro slides after ECB announces plans to halve stimulus package from next year

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The euro lost ground on Thursday (26 October), after the European Central Bank (ECB) revealed it will slow the pace of its quantitative easing programme (QE) from early next year, in a major step towards ending the era of ultra-loose monetary policy.

Shortly after 2pm BST, the common currency was 0.30% and 0.38% lower against the dollar and the yen, trading at $1.1777 and ¥133.82 respectively, but remained broadly unchanged against the pound, fetching 0.8916p.

“We believe that the tapering announcement itself should be considered euro positive, however, since the single currency is currently the best performer against the G10 currencies so far this year, it is probably due a break from appreciation,” said Kathleen Brooks, research director at City Index.

“Even so, we still think that the New Zealand dollar, the pound and Scandinavian currencies remain vulnerable to further euro strength later this year.”

The ECB announced it will continue to make purchases under the asset purchase programme (APP) but the monthly purchase pace will fall from the current €60bn (£53.5bn, $69.3bn) to €30bn from January 2018, adding it will also keep interest rates unchanged at zero in line with Market expectation.

The decision to scale back its asset purchase programme from January was broadly in line with the consensus expectation, but its failure to provide a firm end-date was perceived as slightly dovish by Investors, helping to explain the initial small fall in the euro exchange rate.

“With the euro-zone economic recovery in full swing and growing concerns that the Bank is approaching limits on its asset holdings, today’s decision to reduce its asset purchases came as little surprise,” said Jessica Hinds, European economist at Capital Macroeconomics.

The bank added the APP will run until the end of September 2018, or until policymakers see a sustained adjustment in the path of inflation consistent with its inflation aim.

“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 APP in terms of size and/or duration,” the central bank said in a statement.

QE won’t end suddenly

In his press conference following the announcement, ECB President Mario Draghi revealed the decision to slow down the pace of the QE programme had not been taken unanimously, but there was a “broad consensus on several issues, and a large majority on other issues.”

The ECB has bought around €2tn worth of bonds since its monetary stimulus began in 2015 and Draghi was eager to underline that QE will not “suddenly” end, as the bank planned to buy new bonds when its existing holdings mature.

Despite the dip suffered by the euro, Market reaction was relatively muted.

“My understanding is that Market reaction was pretty muted to our announcement […] in spite of the fact that its a policy announcement of a certain importance, which seems to say that our communication to the Market has been pretty effective,” Draghi said.

On the subject of inflation in the Eurozone, Draghi said it was being influenced from factors having an impact on the global economy.

However, he added, the ECB would focus on matters closer to home, which it can influence, and pointed out more than seven million jobs were created in the Eurozone in the last four years, which he described as a clear sign that his policies are bearing fruit.



Source: ibtimes.co.uk

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