Markets

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

European Central Bank President Mario Draghi is conducting a masterclass in how to wean an economy off quantitative easing without prompting tighter monetary conditions.

Impressively Impassive
The ECB's move to taper QE has avoided a tantrum in German bonds

Thursday's announcement that government bond purchases will be halved to 30 billion euros ($35.3 billion) per month next year with the program extended at least until September was bang in line with market expectations. Leaving open the possibility of a further extension in either time or size, combined with a commitment to continue reinvesting about 15 billion euros of monthly income from the bond stockpile, further softens the impact.

Still Growing
The ECB balance sheet will grow by about 10 percent by the end of next year

While Draghi said that Thursday's policy decision wasn't unanimous, the changes suggest his view still prevails at the governing council, with nary a dissenting peep out of the hawks for ages. "The atmosphere was pretty positive," Draghi said at the press conference following the ECB meeting. The central bank sees "unabated growth momentum in the second half of this year."

Reinvestment with no end-date is key; 30 billion euros really means 45 billion euros per month in the first nine months of next year, with at least 15 billion euros after that.  The QE program "is not going to stop suddenly," Draghi said. 

Draghi really went to town stressing the open-ended nature of reinvestment, emphasizing it will extend beyond the point when the monthly flow of purchases ends -- though there is no prescribed end to that either. QE forever.  

What has not been detailed today, but may be broken down at the next meeting, is the relative size of the Public Sector Purchase Program versus the Corporate Sector Purchase Program. The latter will almost certainly take a rising share of overall purchases. This will partly help officials get round the scarcity issue in government bonds.

The muted reaction in the bond market reflects the lack of action on interest rates, either now or in the foreseeable future. Rates will remain low for an "extended period of time, and well past the horizon of our net asset purchases," Draghi said.

Low for Longer
Traders have reduced expectations for a rate increase at the ECB's December 2018 meeting
Source: Bloomberg's WIRP function

"The market reaction has been pretty muted," Draghi said, a satisfied smile flickering across his lips. "Which seems to say that our communication to the market has been pretty effective." For now, he has every reason to be pleased. The true test, however, will come once it's time to raise borrowing costs.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Mark Gilbert in London at magilbert@bloomberg.net
Marcus Ashworth in London at mashworth4@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net