Euro, bond yields drop as ECB keeps stimulus taps on

LONDON: Euro zone bond yields and the euro currency fell on Thursday after the European Central Bank said it would extend asset purchases until at least September 2018 at a reduced pace.

The ECB said it would continue its bond-buying scheme beyond its current December 2017 end date, but cut monthly purchases to 30 billion euros from 60 billion euros.

The central bank's head, Mario Draghi, said a "very substantial" degree of monetary stimulus was still needed, citing concerns that inflation is yet to show signs of a sustained upward trend.

The euro fell almost a full percent to the day's lows of $1.1708, while an index of euro zone banking stocks rose 1.5 percent to their highest level in over three weeks.

Government bond yields and money market rates dropped as investors started to price in less than a 30 percent chance of an ECB interest rate hike by the end of 2018.

"There is a relief in markets that the ECB extended the programme by nine months and that the (monthly) pace still remains quite high," ING strategist Martin van Vliet said.

Euro zone government bond yields fell across the board. The yield on Germany's 10-year government bond was down 4 basis points on the day at 0.43 percent.

The decision helped narrow the gap between the borrowing costs of the euro zone's strongest and weakest countries: the Italy-Germany bond yield spread, for example, moved to its tightest level in 2-1/2 months at 152 basis points.

Spain's 10-year government bond yields were set to record their biggest daily fall of the year, a move partly driven by domestic political developments in Catalonia.

The ECB kept key interest rates at their current levels and said they would remain at their present levels well past the horizon of net asset purchases.

The central bank also said it will reinvest the principal payments from maturing securities for an extended period of time after the end of the programme "for as long as necessary".

"I continue to expect a very gradual withdrawal of policy accommodation with asset purchases likely to continue beyond the horizon of the new programme announced today," said Fidelity economist Anna Stupnytska.