When is tapering not tapering?
Thursday's European Central Bank press conference was a masterclass in expectations management from President Mario Draghi, as he smoothed the impact of what on paper looks just like tapering. He was at pains to emphasize that such a subject wasn't even on the agenda.
The last thing Draghi wanted is for lowering the monthly pace of bond purchases to turn into a Fed "taper tantrum" communication problem. If it wasn't for his "whatever it takes" reputation, this could easily have turned into a rout.
Expectations were for an additional six months of purchases at an 80 billion euro ($84.8 billion) rate, and now it's going to be nine months at 60 billion euros. The current program was due to expire in March, so with no announcement today the rate would have been zero at zero. It's hard to call what we now have a disappointment, but not impossible.
Extending quantitative easing by nine months clearly softens the blow for sensitive markets, coming just four days after the Italian referendum. The ECB's also reserved the flexibility to increase or extend purchases in case of market stress or lower-than-forecast inflation. But there's more to it than the amount of bonds being bought, and the overall picture is that the ECB is trying to get out of its own way.
The initial reaction from European bonds was a sharp selloff, and this was more pronounced in the periphery. Bond prices in some countries now look to have stabilized above their lowest levels of the day -- investors seem to be giving Draghi the benefit of the doubt as he repeatedly stressed that this was not a tapering but extended presence.
The ECB seems to have been mindful of core countries' wariness of long-term exposure to bailed-out nations. A new capability for it to buy shorter, top quality bonds will drive up long yields and lower short ones, and should allow core countries to reduce the overall maturity of their debt holdings. This should allow a swifter exit from QE once the program stops.
It also looks like traders have been heard. The ECB will now accept cash for its securities lending program, so dealers no longer have to put up one German bond in order to borrow another, making the whole market more expensive. Put cash in, get bunds out is a major step forward to easing up super-tight collateral -- and unblocking strains in repo markets that were casting a long shadow over the stability of Europe's entire financial system.
Similarly, eliminating the minimum yield on the bonds it buys, and allowing the purchase of bonds due in one year (previously the shortest it could go was two years) makes all the operations more effective.
They'll need the help. The roster of 2017 elections is clearly a big stability issue for the ECB -- but this is why he drummed in the message that the ECB is there for markets for all of 2017. Your caring, sharing central bank has your back.
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