European Central Bank calls halt to quantitative easing, despite 'soft' euro

EUR  CHF

European Central Bank chief Mario Draghi was at pains on Thursday to reassure investors that there would be an "ample degree of monetary accommodation" in the euro zone. "It can only create damages". That provided extra support for the notes, which have been boosted by more euro-friendly rhetoric from officials in Italy's newly formed government.

That jolted financial markets last month, though Italy's new finance minister has helped calm investors by saying recently that his country has no intention to leave the currency union. Fed Governor Lael Brainard, among the most dovish policymakers least anxious to tighten, said on May 31 "the sizable fiscal stimulus that is in train is likely to provide a tailwind to growth in the second half of the year and beyond".

The Dow Jones Industrial Average fell 25.89 points, or 0.10 per cent, to 25,175.31, the S&P 500 gained 6.86 points, or 0.25 per cent, to 2,782.49 and the Nasdaq Composite added 65.34 points, or 0.85 per cent, to 7,761.04. It still expects growth of 1.9 per cent in 2019 and 1.7 per cent in 2020.

MSCI's broadest index of Asia-Pacific shares outside Japan lost 1.0 percent. The ECB announced that it would end its bond-purchase programme at year-end but signalled that any interest rate hike was still distant.

The program is credited with raising inflation to the ECB's target of just under 2 percent.

The rate of inflation is expected to be 1.7% in 2018, up from the 1.4% predicted previously due to higher oil prices.

The euro on Friday was headed for its biggest weekly loss in 19 months after the European Central Bank unexpectedly said it would keep interest rates at record lows well into next year.

The currency dropped sharply within minutes of the announcement, initially falling from $1.1820 to $1.1725, to trade at 1.1638 by 4.30pm.

The stimulus program has since 2015 been pumping newly created money into the financial system, driving down longer-term interest rates for borrowers such as governments and home buyers.

The ECB said it would taper its bond-buying programme down to 15 billion euros a month in the fourth quarter from 30 billion euros a month now in a move that broadly met market expectations.

Sterling steadied above its lowest level since November, after strong US retail sales and a more hawkish Federal Reserve earlier this week boosted the dollar and underlined policy divergence between the countries. The central bank said that "uncertainties regarding the prospects for the German economy are considerably greater than they were".

With sizeable stock of acquired assets, worth 2.4 trillion euros as of May, together with reinvestments of the principal payments from maturing securities purchased after the end of asset purchase program, as well as forward guidance on interest rates, the European Central Bank intends to ensure the ample degree of monetary easing for an extended period of time. The Fed purchased some $3.6 trillion in bonds, while the ECB will have loaded 2.6 trillion euros ($3.1 trillion) of bonds on its balance sheet, in both cases a measure of the total size of the banks' stimulus efforts.

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