By Fortune Editors and Reuters
October 26, 2017

The European Central Bank is all but certain to cut back on its bond-buying stimulus on Thursday, one of the biggest factors supporting the rally in global stock markets in recent months.

The plans, due to be announced at a press conference at 0830 Eastern Time, will be the Frankfurt-based bank’s biggest step yet in unwinding years of loose monetary policy. But it is likely to be a less-but-longer move, that cuts back on the volume of money created, but extends the program’s timeframe.

The ECB can move move because the Eurozone’s economic recovery is now well into its fifth year. The fact that the Federal Reserve has ended its ‘quantitative easing’ and started to raise interest rates means that it can do so without too much risk of pushing the euro sharply higher and hitting the bloc’s exporters.

Lending data for September, which were published earlier Thursday, are also likely strengthen the ECB‘s confidence, as they showed bank credit to Eurozone companies and households growing at the fastest pace since the start of the financial crisis.

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But the ECB, like the Fed, is still bothered about low inflation, so while it is expected to turn the taps down, it is also expected to extend its program.

“I’m convinced that the ‘plan’ is to go ‘lower’ in terms of pace of buying, for ‘longer’ in the hope of pushing out expectations about rate hikes,” Kit Juckes, an analyst at Société Générale, said.

Policymakers from the 19 Eurozone countries are seen cutting bond purchases by half to 30 billion euros a month from 60 billion currently. Sources close to the discussion said they will likely agree to extend the program to September 2018, nine months beyond the current end date. They’ll also reaffirm a commitment to keep rates steady until well after the purchases end, sources said.

Instigated nearly three years ago to stave off deflation, the ECB‘s 2.3 trillion bond buying scheme has cut funding costs and revived borrowing and spending.

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Hawks like Germany and the Netherlands now want a commitment to end these buys, arguing that they have also increased risks to financial instability and allowed other countries to put off necessary reforms. Doves on the bloc’s periphery, meanwhile, warn that a rapid exit could tighten financial conditions, undoing years of work.

The broader outlook is as good as it has been since before the global financial crisis. An unbroken growth streak has created 7 million jobs and the expansion is now self-sustaining, driven by domestic consumption.

Banks are better capitalised, lending is growing and the sharp economic divergence between the ‘core’ and the ‘periphery’ – the biggest failure of the currency project – appears to have halted.

Yet inflation will miss the ECB‘s target of almost 2 percent, as labour market slack remains large, keeping a lid on wage growth.

Another problem for continuing the QE program is that the ECB is slowly running out of bonds to buy in some countries, which may force it to redesign the program’s rules. While a nine-month extension at a reduced pace is viable under current rules, another move could require more creativity as the ECB would be running low on German bonds to buy. The ECB aims to distribute its purchases around the bloc, in rough proportion to each member state’s relative economic weight.

 

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