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Financial News: ECB Unveils "Lower For Longer" Taper Plan

ECB Unveils "Lower For Longer" Taper Plan

10/26/2017 - 08:31:00 (RTTNews)

(RTTNews) - The European Central Bank sprung no surprises on Thursday as it announced that it will reduce the size of its asset purchases at the start of next year, while extended them for nine months, the "lower for longer" style of tapering that economists had expected a dovish Mario Draghi to deliver.

Monthly asset purchases under the asset purchase programme, or APP, will continue at the current monthly pace of EUR 60 billion until the end of December 2017, the bank said in its statement.

From January 2018, the net asset purchases will be reduced to a monthly pace of EUR 30 billion, which will continue until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim, the bank added.

Without announcing an end-date for asset purchases, the ECB has retained the room for tweaking or extending them in future if the euro area economic outlook worsens.

Draghi is set to hold his customary post-decision press conference at 8.30 am ET when he will detail the rationale behind the latest policy decisions.

The ECB is scaling down the size of asset purchases for a second time as it had reduced the volume in March this year from EUR 80 billion.

The bank also kept all its three interest rates unchanged for a thirteenth consecutive policy session.

The main refi rate was held at a record low zero percent and the deposit rate at -0.40 percent. The marginal lending facility rate was kept at 0.25 percent.

The ECB retained the guidance on both interest rates and asset purchases that may help to ease the upward pressure on the euro and bond yields.

"The Governing Council continues to expect the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases," the bank said.

"If the outlook becomes less favorable, 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 ECB added.

In the June policy announcement, Draghi adjusted the forward guidance to drop the easing bias on interest rates.

That said, an interest rate hike could be a very long way off. Draghi is likely to stress on policy "sequencing" asserting that an increase in interest rates would appear only after the end of asset purchases in 2018. That does not mean immediately afterwards, but sometime in 2019, some economists said.

Eurozone inflation has proven to be a constant worry to policymakers, staying away from the ECB's target of "below, but close to 2 percent" for quite some time. Price growth lost steam after energy prices cooled.

The headline inflation was steady at 1.5 percent in September and the policy-relevant core figure eased marginally to 1.1 percent.

Meanwhile, the euro area economy has been resilient expanding 0.6 percent in the second quarter after a 0.5 percent growth in the first three months of the year. Recent surveys and economic indicators suggest the momentum continued in the third quarter and is likely to gain strength in the final three months of the year.

Many hope that the tapering move announced on Thursday would be the beginning of the end of ultra-easy monetary policy since the 2007-08 global financial crisis that saw a daring Draghi test the limits of unconventional policy by taking deposit rates to negative territory and buying corporate and state debt.

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