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The European Central Bank’s monthly monetary policy meeting which concluded on Thursday, November 8, showed that the central bank had extended its bond purchases from March 2017 to the end of 2017. The decision to extend QE takes the central bank’s total size of QE purchases above EUR 2.2 trillion. The central bank chief, Mario Draghi insisted that there was no question of the ECB tapering its QE program even after the monthly purchases were cut by a third.

The ECB president revealed that policy makers were split over the central bank’s decision. The ECB announced that it would cut its monthly bond purchases from the current EUR80 billion to EUR60 billion from April next year. Experts were expecting the ECB’s QE program to continue at the pace of EUR80 billion until September.

So while there was a disappointment in that the ECB lowered its bond purchases, Draghi made up for it by extending until the end of 2017. As a result, the euro fell sharply on the day, despite initially posting intraday gains ahead of the ECB’s decision.

“It took everyone a bit of time to make their maths. They’re actually going to buy more than expected,” said Olivier de Larouzière, head of interest rates at Natixis Asset Management.

In the ECB’s press conference, Mr. Draghi said that the central bank’s governing council reached a “very, very broad consensus” that the bond purchases could continue beyond 2017 if they felt it was necessary to lift inflation back to the central bank’s 2% target rate.

The single currency initially rose to a two-month high against the greenback as the ECB lowered its QE amount, but soon tumbled as the central bank signaled an extension to the QE program for nine months. EURUSD fell 1.3% to $1.0615 from the intraday high at $1.0874. The EURGBP was weaker, losing 1.0% to 0.8433. However, by Friday morning there were signs that the initial euphoria was already fading as the markets turn focus to next week’s FOMC meeting where the Fed is expected to hike rates for the second time.

1-eurusd-priceEURUSD – 1 week price chart (Source:

The ECB also noted that it was relaxing its bond purchase roles by broadening the maturity range for eligible securities. The central bank will now purchase bonds yielding below the central bank’s deposit rate of -0.4% with a maturity of one year. Draghi said that purchasing bonds below the bank’s deposit rate would result in a loss for the central bank but highlighted that the stability outweighed profits.

ECB releases new growth forecasts

The central bank also released new inflation and growth forecasts which were broadly unchanged from its previous forecasts released three months ago.

2-ecb-projectionsECB Staff Projections (December 2016)

According to new estimates, the ECB expects the economy to expand at a rate of 1.7% – 1.6% between 2016 through 2019. Inflation is projected to rise to 1.7% only by 2018 while sounding optimistic that inflation will rise to 1.3% next year. Draghi said that this was not really close to its mandated target rate, noting that “We have to persist. We know there is a gradual convergence to that objective.”

The new staff projections, especially on inflation is likely to signal that the central bank could continue with its bond purchases beyond 2017, especially if inflation fails to rise to the 1.3% projected target rate for next year.

With the ECB’s decision now out of the way, the markets will turn their attention to next week’s FOMC meeting. Expectations run high that the Fed will be increasing the short term interest rates by 25 basis points bringing the effective fed funds rate to 0.75%. With the markets almost convinced of the rate hike, the forward projections will be critical with expectations that the Fed could hike twice next year at the very least.