The financial world's focus this week was on the European Central Bank's Thursday meeting and expectations of an announcement regarding changes to its quantitative easing (QE) program. Under this kind of program, central banks purchase securities in order to lower interest rates and increase the money supply.

Markets expected that, starting in January, the ECB's monthly bond purchases would be cut in half to 30 billion euros ($35 billion) and the program extended nine months into 2018. And indeed, that is exactly what was announced.

But in addition, ECB President Mario Draghi pointedly stated that this was not a “tapering” of QE (echoing language used by the U.S. Federal Reserve when it was in this situation) but rather a “down size” of the program. He also said that the program's end date is open-ended, meaning it may not end in September 2018.

Markets took his tone to be unmistakably dovish and this sent both the euro and European bond yields lower in the wake of the decision.

Currently, the ECB is buying 60 billion euros worth of bonds every month. There has been a steady decline in the quality of those bonds: In March 2015, when the ECB started its QE program, the focus was on buying European sovereign debt; that moved to high-quality bank debt and eventually to corporate bonds.

Part of the debate about the ECB's program is not so much economic as it is about the viability of these bonds that are being purchased. At each point that a new class of debt instruments was deemed eligible for ECB purchases, credit quality dropped. And yet, the current stock of eligible bonds is diminishing to the point where curbing the buying of bonds is more about lack of supply rather than monetary policy.

Our View: With this decision the ECB has made it clear that inflationary pressures – or the current lack thereof – will dictate policy. This is in contrast to other central banks, including the U.S. Federal Reserve, the Bank of Canada and the Bank of England, which meets next week and is expected to tighten policy.

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