Euro slumps as ECB signals gradual end to quantitative easing

The euro fell to a four-month low against the dollar on Thursday after European Central Bank president Mario Draghi signalled the bank was likely to taper its so-called quantitative easing (QE) scheme rather than ending it abruptly.

“An abrupt ending to bond purchases, I think, is unlikely,” Mr Draghi said in a press conference in Frankfurt following the bank’s decision to keep its main interest rate unchanged at zero.

A sudden stop “is not present in anybody’s mind,” he said, while noting the ECB’s governing council did not discuss prolonging or tapering QE at this month’s policy meeting.

His comments keep the central bank on track for a potential extension of its bond-buying programme, as predicted by economists.

Mr Draghi said the publication of fresh economic forecasts in December combined with the results of internal studies on options to avoid running into bond shortages would inform the bank’s decision.

"He really wanted to shut down any suggestion that the ECB is going to taper any time soon, but he what he actually did was to tell people to come back in December and see what the ECB thinks then," said James Athey, a money manager at Aberdeen Asset Management in London.

“That will leave enough unanswered questions to keep bond markets volatile. An already nervous market will not take much comfort from his obfuscation today,” he added.

Bloomberg News reported earlier this month that ECB policymakers had built an informal consensus that QE will be gradually wound down once the decision is taken to end the programme.

Meanwhile, the ECB reaffirmed that QE would continue to run at the pace of € 80 billion per month until March 2017.

However, the bank has always said it would run until it saw a sustained recovery in inflation towards its 2 per cent target.

The bank left its main refinancing rate unchanged at zero and the deposit rate at -0.4 per cent. Having initially climbed against the dollar, the euro traded down 0.2 per cent at $1.095 on foot of Mr Draghi’s comments, its weakest level since June. Euro-area bond yields also traded marginally lower.

Mr Draghi noted that there is no “convincing upward trend” in underlying inflation, adding that “we want a convergence which is self sustained, without the extraordinary policy support in place now”.

He said earlier this month that consumer-price growth will probably be near the target by late 2018 or early 2019.

The ECB’s current projections, which see inflation at 1.6 per cent in 2018, are built on expectations of “additional monetary policy measures”, according to an account of last month’s council meeting.

Though euro zone inflation rose to 0.4 per cent last month and may exceed 1 per cent by early next year, the rise is due almost entirely to the rebound in oil prices and not a rise in underlying prices.

Additional reporting by Bloomberg