The European Central Bank is adding half a trillion euros ($579 billion) in stimulus to the eurozone economy as it hopes to support growth as Europe heads into what could be a tumultuous election year.
The chief monetary authority for the 19 countries that use the euro said Thursday it would keep injecting money into the economy through its bond-buying program until at least December, past the previous end date of March.
It will reduce the amount of bonds it buys after March to 60 billion euros ($64 billion) a month from 80 billion euros. That effectively adds at least 540 billion euros in stimulus to the existing 1.74 billion ($1.87 trillion) effort.
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 program.
The euro fell in international markets, declining 0.9 percent against the dollar to $1.0655. More stimulus like bond-buying tends to weigh on a currency.
Economist Carsten Brzeski at ING-DiBa said the ECB risked sending the impression it was focused on reducing the rate of stimulus - so-called tapering - rather than increasing it. "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."
The purchases pump freshly printed money into the banking system in hopes of increasing weak inflation and boosting growth. The flood of cash also helps keep financial markets calmer as Europe faces elections in the Netherlands and France next year where anti-EU, populist candidates are expected to do well.
By extending stimulus, the ECB is moving in the opposite direction to that of the U.S. Federal Reserve. The U.S. central bank is contemplating another interest rate increase at its Dec. 13-14 meeting. Markets have been betting that President-elect Trump will carry through on promises to spend more on infrastructure such as roads and bridges after he is inaugurated Jan. 20, boosting growth and inflation in the months and years ahead. That would give the Fed more reason to raise rates.
Beyond the stimulus program, 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 percent 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 percent annual inflation, considered best for growth and jobs, and right now inflation is only 0.6 percent annually. That's 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 percent in November - lower than the 0.9 percent reading from a year ago. Meanwhile, economic growth is only modest at 0.3 percent 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 Donald 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 isn't the favorite to win in the second round in May. She wants France, a member of the euro, to follow Britain in leaving the European Union.
There's more. Italian Prime Minister Matteo Renzi resigned after voters rejected his proposed constitutional changes in a referendum 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 Renzi's downfall in stride. That hasn't 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 hopes it will be used for loans and increase business activity. But the purchases also have the side effect of tranquilizing bond markets because participants know there is a big buyer that can't 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 like Italy seeking to roll over large debt burdens, raised fears in 2011 that the eurozone might break up.