The European Central Bank has decided to extend its bond-buying stimulus programme by another nine months to support the economy amid increasing turbulence from populist politics.
The chief monetary authority for the 19 countries that use the euro said that after March it would keep buying bonds, but at a reduced rate of €60bn a month.
Currently, it is buying €80bn per month through March.
The ECB purchases, which have been running since March 2015, pump freshly created money into the banking system in the hopes of increasing weak inflation and boosting growth.
The move also helps keep markets calmer as Europe faces elections next year in the Netherlands and France, where anti-EU, populist candidates are expected to do well.
The reduced amount startled analysts, many of whom predicted an extension at the same pace.
Still, the total amount of stimulus is slightly more than if the ECB had extended for only six months at the current rate.
The central bank also said it could increase the monthly purchases if needed and that there is still no firm end date for the stimulus programme.
Economist Carsten Brzeski, at ING-DiBa, said the ECB risked getting a negative reaction in markets by sending the impression it was focused on reducing the rate of stimulus rather than increasing it.
He said: “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.”
By extending stimulus, the ECB is moving in the opposite direction to that of the US Federal Reserve.
The US central bank is contemplating another interest rate increase at its December 13-14 meeting.
Markets have been betting that President-elect Donald Trump will carry through on promises to spend more on infrastructure such as roads and bridges after he is inaugurated on January 20, boosting growth and inflation in the months and years ahead.
That would give the Fed more reason to raise rates.
Beyond the stimulus programme, the ECB’s 25-member governing council kept its key interest rate benchmarks unchanged.
It left at zero its refinancing rate, at which it lends money to commercial banks, and minus 0.4% on deposits it takes from banks.
That negative rate aims to push banks to lend money and not hoard it at the ECB.
ECB president Mario Draghi had made clear in recent days that the bank was not seeing a convincing upturn in inflation. The bank aims for 2% annual inflation, considered best for growth and jobs, and right now inflation is only 0.6% annually. That is better than the falling prices seen earlier this year, but still well below target.
Worse, core inflation, which includes volatile fuel and food, remained stuck at 0.8% in November – lower than the 0.9% reading from a year ago.
Meanwhile, economic growth is only modest at 0.3% in the third quarter.
On top of that, the shared euro currency could be facing serious political turbulence.
The British vote to leave the European Union and the election of Mr Trump in the United States are considered to have boosted the prospects of anti-elite and anti-EU politicians.
Next year could see a strong showing by anti-immigration politician Geert Wilders and his Party For Freedom in the Netherlands in March.
In France, National Front leader Marine Le Pen is expected to make it past the first round of presidential voting in April, although she is not the favourite to win in the second round in May.
She wants France, a member of the euro, to follow Britain in leaving the EU.
Italian prime minister Matteo Renzi resigned after voters rejected his proposed constitutional changes in a referendum on Sunday.
That means political uncertainty about who will be the next prime minister, just as the government faces troubles with the country’s banks. The third largest, Monte dei Paschi di Siena, is struggling under the weight of bad loans and may need a government-funded rescue soon.
So far, markets have taken Mr Renzi’s downfall in their stride.
That has not eliminated fears, however, that Italy may again become a source of trouble for the eurozone.
ECB bond purchases are aimed at raising inflation by adding to the supply of money in the financial system in the hopes it will be used for loans and increase business activity.
But the purchases also have the side-effect of tranquilising bond markets because participants know there is a big buyer that cannot run out of money due to its power as the legal issuer of the euro currency to print more cash if needed.
That keeps bond prices up and holds down interest yields, which move opposite to prices.
Bond market turbulence, in the form of rising borrowing costs for indebted governments such as Italy seeking to roll over large debt burdens, raised fears in 2011 that the eurozone might break up.