European Central Bank adds half a trillion euros in stimulus

The European Central Bank is adding half a trillion euros (USD 579 billion) in stimulus to the eurozone economy to support growth as Europe heads into what could be a tumultuous election year.

The bank's 25-member governing council startled markets today by reducing the monthly amount of its bond purchases, by which it performs the stimulus, but extending them for six months instead of nine.

ECB President Mario Draghi said the reduction did not mean the bank was tapering, or phasing out, the stimulus.

The chief monetary authority for the 19 countries that use the euro said the bond purchases would continue at least through December, past the previous earliest end date of March.
 

After March, it will reduce the amount of bonds it buys to 60 billion euros (USD 64 billion) a month from 80 billion euros. That effectively adds at least 540 billion euros in stimulus to the existing 1.74 billion (USD 1.87 trillion) effort.

Draghi said the central bank could increase the monthly purchases if needed and that there is still no firm end date for the stimulus program. He said it meant "a more lasting transmission of our monetary stimulus," not a reduction in support.

The euro fell in international markets, declining 0.9 per cent against the dollar to USD 1.0655. More stimulus like bond-buying tends to weigh on a currency.

Economist Carsten Brzeski at ING-DiBa said the ECB risked sending the impression it was focused on reducing the rate of stimulus rather than increasing it. "It is the combination of extending and tapering that we thought would not yet happen as it could risk an unwarranted increase in bond yields."

"Even without calling this tapering, the ECB just announced tapering."

The bond purchases pump freshly created money into the banking system in hopes of increasing weak inflation and boosting growth. The flood of cash also helps keep financial markets calmer as Europe faces elections in the Netherlands and France next year where anti-EU, populist candidates are expected to do well.