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ECB tapers stimulus but extends time frame

Adam Shell
USA TODAY

The European Central Bank on Thursday extended its stimulus program until the end of the year, but said beginning in April it would start reducing -- or "tapering" -- the amount of euros used each month to purchase financial assets.

German artist Ottmar Hörl 's sculpture depicting the Euro logo is pictured in front of the former headquarter of the European Central Bank (ECB) in Frankfurt.

The ECB’s stimulus program, designed to stoke inflation and boost economic growth, centers around an asset-purchase program where it buys investments, such as government bonds and corporate debt, in an effort to keep borrowing costs low. Prior to today's meeting the ECB was buying assets at a clip of 80 billion euros per month, a program the ECB planned to end in March.

But today, ECB president Mario Draghi, revised the plan. The ECB extended the asset purchases an additional nine months to the end of December 2017. That extension was longer than the six months many investors expected. But, in a move investors had hoped the ECB would avoid, Draghi said that starting in April it would trim the pace of asset purchases to 60 billion euros per month, down from 80 billion euros.

When you add it up, the ECB will commit a total of 780 billion euros to its stimulus program next year, up from 240 billion euros had it not extended the buying beyond March 2017.

The euro weakened vs. the dollar on the news. U.S. stocks were unmoved by the decision, with the Dow down 6 points after rallying nearly 300 points Wednesday.

Craig Erlam, senior market analyst at OANDA, dubbed the ECB's latest move "tapering with a twist."

"The number of purchases has been reduced but the expiration (date of the program) has been pushed back," Erlam explained.

Given the continued weakness of inflation and heightened political and economic uncertainty (in Europe), investors were looking for additional stimulus from the ECB, said Jennifer McKeown of investment research firm Capital Economics.

Many felt tapering of the ECB's asset purchases — or reducing the amount of euros it devotes to the program — would be put on hold after the Italian referendum Sunday. which created fresh political uncertainty in Italy and focused a spotlight on its debt-laden banks.

Says Aberdeen Asset Management investment manager Patrick O’Donnell: “Draghi might not want to call this a taper but that’s exactly what it is. The ECB has reduced the amount of purchases and the duration of them. That’s a taper. Draghi has clearly got sandwiched between those calling for the ECB to reduce emergency levels of support and those who want more. But he’s not kidding anyone."

The ECB also left open the possibility of increasing the monthly purchases or duration if the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation.

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