ECB extends monthly asset purchases until March 2017

European Central Bank President Mario Draghi has announced the asset purchase programme will be extended to March 2017 from the original finish date of September 2016.

However, the ECB decided to keep asset purchases at €60bn a month, in a move that surprised analysts who had expected an increase to around €75bn.

The ECB will extend the range of assets that are eligible for quantitative easing to include the purchase of regional and local government debt.

Draghi added that the central bank will reinvest the principal payments on the securities purchased under the QE programme as they mature, as long as necessary.

The decision was not unanimous but a large majority of Governing Council members backed the action, Draghi said.

The euro surged 2.36% against the dollar to $1.0865 after the remarks. European stocks plunged at 1410 GMT with the DAX index down 2.87%, the CAC 40 down 2.50%, the FTSE MIB down 1.53% and the IBEX 35 down 1.94%.

"After months of jostling and predictions that Mario Draghi would act he hasn’t disappointed and has moved to offer more than was originally expected," said James Hughes, chief market analyst at GKFX. "However we have seen huge market reaction on the back of the announcement as the euro jumped on the back of a mix of confusion and disappointment over the lack of movement on the discount and benchmark rates."

The announcement followed the ECB's policy decision, which revealed a 10 basis point cut to the deposit rate to -0.30%, as expected. Interest rates and the marginal lending rate were unsurprisingly left unchanged at 0.05% and 0.30%, respectively.

The ECB cut its forecasts on headline inflation to 0.1% in 2015 (0.1% in September), 1.0% in 2016 (1.1%) and 1.6% in 2017 (1.7%). The central bank is targeting inflation of just below 2%.

"Let me make this clear. We are doing more, because it works, not because it fails," Draghi said, adding that the extension to QE came after a series of downward revisions to inflation.

Draghi said the ECB's QE has been "quite effective" as it has seen euro-area bond yields fall 120 basis points since June 2014 along with a drop in the cost of credit.

The president said without QE, the Eurozone would enter deflation next year, falling half a percentage point. He also insisted that the ECB will not run out of assets to buy through its QE programme.

Finally, Draghi once again stressed that governments needed to adopt more growth-friendly fiscal policies as monetary policy alone would not help the Eurozone's recovery.

Ahead of the policy announcement, the ECB was under pressure to take action to lift inflation back towards its target. In a preliminary estimate from Eurostat on Wednesday, the Eurozone consumer price index held at 0.1% growth year-on-year in November, missing forecasts of 0.2%.

"This week’s CPI figure, showing inflation at just 0.1% across the single currency bloc, added further weight to the case for immediate action," said Ben Brettell, senior economist at Hargreaves Lansdown.

"However, judging by the market reaction, Draghi appears to have over-promised and under-delivered."

Craig Erlam, senior market analyst at Oanda, said he was surprised by the decision on asset purchases which he believed may have been a result of projected tightening by the Federal Reserve. The Fed is expected to raise interest rates after its meeting on 15-16 December.

"The euro has weakened dramatically already against the dollar due to the intentions of the Fed which has effectively given the ECB a free pass," he said. "With that in mind, I can’t help but think the ECB has bottled it today and will be forced to do more next year as inflation continues to fall well short of target."