ECB December 8th policy decisions and market reaction

Aiming to support euro area economic growth and secure a sustained convergence of inflation towards levels consistent with the medium-term target of “below but close to 2%”, the ECB Governing Council decided at the December 8th monetary policy meeting(i)An extension of the APP for 9 months until at least December 2017,(ii)A reduction in the monthly pace of asset purchases to €60bn from €80bn, effective as of April 2017,(iii)Adjustment on certain parameters of the APP, effective as of January 2nd 2017 aiming to address the bond scarcity issue though it has been less of an issue for the ECB lately after the recent increase in long-term bond yields,(iv)Introduction of cash collateral in the PSPP securities lending facilities without having to reinvest it in a cash-neutral manner, an option offered by the ECB and by the national central bank of Belgium, Germany, Ireland, Spain and the Netherlands,(v)Key interest rates remained unchanged.