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.

FX Newsletter Graphic Subscribe at CNB.com/subscribe

The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.