The euro recorded modest gains versus the dollar after the European Central Bank kept its monetary policy unchanged on Thursday but opted to slow down the pace of net asset purchases under its emergency scheme. Markets had been eagerly awaiting the Frankfurt institution’s latest policy decision for signs of an imminent unwinding of pandemic-era stimulus, amid surging inflation and strong economic growth.

The European Central Bank will trim emergency bond purchases over the coming quarter, it said on Thursday, taking a first small step towards unwinding the emergency economic aid it has put in place during the pandemic.

After a two-day meeting of its governing council, the ECB said it had decided to move to “a moderately lower pace” in its €1.85 trillion Pandemic Emergency Purchase Programme (PEPP) from the €80 billion a month it bought since March.

The Governing Council also voted to maintain the interest rate on the ECB’s main refinancing operations at 0%, on the marginal lending facility at 0.25% and on the deposit facility at -0.5%. The ECB also reiterated that interest rates will remain at their present or lower levels until inflation is seen reaching 2% “well ahead of the end of its projection horizon and durably for the rest of the projection horizon,” and until the ECB judges that inflation will stabilize at 2% over the medium term.

“This may also imply a transitory period in which inflation is moderately above target,” the ECB added.

And on inflation projections, the ECB raised its longer-term inflation projections to 2.2% in 2021, 1.7% in 2022 and 1.5% in 2023. Core inflation, which excludes volatile food and energy prices, is now forecast at 1.3% in 2021, 1.4% in 2022 and 1.5% in 2023.

The euro rose 0.3% to the day's high of $1.18411 immediately after the announcement but then fell back to trade lower, still meandering in the middle of this week range.

The central bank’s PEPP was implemented in March 2020 to support the Eurozone economy through the COVID-19 crisis and is due to end in March 2022 at a potential total value of €1.85 trillion. Analysts estimated the bond buying under the ECB's PEPP falling to possibly as low as €60 billion a month, before a further fall early next year toward the end of the scheme. Some analysts also have suggested that the ECB will announce the reduction of its COVID-induced stimulus package in December, with the U.S. Federal Reserve having signalled that it will likely begin tapering by the end of the year. The ECB however did not signal any further withdrawal of support and maintained its long-standing guidance that it will ramp up support further if it becomes necessary.