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The European Central Bank Says It Will Wean Europe Off Easy Money—Slowly

The end of the money-for-nothing policy that the world’s central banks put in place after the 2008 financial crisis is nearly in sight.

The Frankfurt-based European Central Bank said Thursday it will cut its monthly bond purchases by half at the end of the year to €30 billion ($36 billion). They’ll stay at that level at least until September next year.

That’s important because the ECB’s liquidity is one of the biggest remaining supporting factors behind the global stock market rally, now that the Federal Reserve has ended its own ‘quantitative easing’ program and has started to raise official U.S. interest rates.

The ECB, however, said after its latest policy-making meeting Thursday that it still doesn’t expect to raise its own interest rates until “well past” September next year—and even then, only if it is absolutely sure that inflation is back on track after a decade of undershooting. The ECB’s key rate remains set at precisely 0% (it also still charges banks 0.4% for keeping excess deposits with it).

“Today’s decision is a sea change but a very gentle one; not a big-bang u-turn in ECB monetary policy,” said Carsten Breski. an economist with ING-Diba, the German arm of the Netherlands’ biggest listed bank.

The announcement was at the ‘dovish’ end of the range of market expectations. The euro fell against the dollar by nearly a cent after the announcement. There are two main reasons for that. First, the fact that purchases will still be running at €30 billion a month in September implies that the program may not actually end until much later, as a transition from €30 billion to zero in one month doesn’t gel with the ECB’s desire for a smooth exit.

That leaves the U.S. Federal Reserve the best part of a year to widen the gap between U.S. and Eurozone interest rates still further, a trend that will make the dollar more attractive vis-a-vis the euro (all other things being equal).

In his subsequent press conference, Draghi avoided answering directly whether the ECB would go from €30 billion to zero, saying “we don’t stop suddenly,” but also stressing that the ECB will continue buying new bonds as its old holdings mature.

Read: Mario Draghi Isn’t the Man to Push the Dollar Off a Cliff

“We expect the ECB to extend QE again towards the end of next year, ahead of finishing the program in December 2018, paving the way for a rise in interest rates in the first half of 2019,” said Azad Zangana, senior European economist with London-based fund manager Schroders.

The decision had the opposite effect on Eurozone stocks, which depend to a large degree on exports and therefore benefit from a cheap euro. The Euro Stoxx 50 index the French CAC 40 and German DAX all surged by around 1.5% in response to the press conference, with the only laggards being the banks whose earnings are hurt by low interest rates.

In his press conference, Draghi indicated that some of his colleagues had wanted a cleaner, quicker exit from a policy that many still feel is pumping up asset prices and raising the risk of a future financial crash. Such concerns were most likely voiced most loudly by the two German representatives on the bank’s policy-making council, Jens Weidmann and Sabine Lautenschläger. However, today’s action appears to have pre-empted any pressure from them and other inflation ‘hawks’ for the next year.

UPDATE: This article has been updated with extra information from Draghi’s press conference and comment from Schroders.