The European Central Bank has extended its bond-buying scheme to keep the eurozone recovery on track, but will halve its rate of purchases to €30bn a month. The FT's Thomas Hale explains the significance of the decision.
Produced by Vanessa Kortekaas. Filmed and edited by Petros Gioumpasis.
The major talking point from today's ECB meeting is the decision to cut asset purchases by half from $60 billion a month to $30 billion a month. And this was largely expected, but it does amount to an extension of quantitative easing for a further 9 months, another $270 billion of assets being purchased.
Draghi referred to this in his press conference as a downsize rather than an explicit tapering. So it's interesting, the language that's been used here. Perhaps more important than the asset purchase decision is the clarity around long term interest rates. So the ECB has made it clear that interest rates will remain at their current levels for well beyond the horizon of these asset purchases, and that has been reflected in markets immediately after the meeting.
The German 10-year bond yield is down 5 basis points, Spanish, Italian yields are down 10 basis points. So we've had a reasonable move in the markets, given that this was broadly expected by pretty much everyone, this $30 billion cut.
The euro's fallen half a percentage, so again, a similarly muted move, but probably linked to this clarity around interest rates. We've also seen an uptick in European stocks.
The final important thing from the meeting today really was the clarity around reinvesting maturities of bonds the ECB already holds, bearing in mind Draghi did point to this in December 2015. At that point, they never really took much notice of it, but now they have over $2 trillion of assets. And these are maturing on a weekly basis.
The ECB is committed to reinvesting the proceeds of those maturing bonds. Analysts at UBS estimate that this could amount to another $100 billion of effective purchases, next year, $180 billion in 2019.
So aside from the cut in purchases that's been announced, the $30 billion, there's also this silent, additional contribution to the market that's going to be going on in the background.