Tapering With a Twist

The ECB announced today that it will begin tapering its asset purchases from April next year in a clear sign that it is reaching the limits of what it is willing to do under the bond buying program. It's clear that there were other options available to the ECB today and yet, there was not the support within the monetary policy committee to enact such changes.

Despite an initial spike, the euro is not behaving like a taper has just been announced and instead is making new lows for the day. The reason for this is that we have not just had a normal tapering of QE, the ECB has delivered a taper with a twist. The number of purchases has been reduced but the expiry has been pushed back to December, rather than September which is what was expected.

The result is that the ECB has committed to buying €540 billion of debt rather than €480 billion, which it would had the monthly bond purchases not been reduced and the program extended by six months. While this may be a neat little trick by the governing council, it's only technically a larger stimulus package if they would have otherwise reduced purchases to zero from September, which is extremely unlikely.

That being the case, what we've seen today is Draghi and the ECB playing the game and with the euro currently lower, they're winning. The reality is that this is still a tapering and still less stimulus than the markets were pricing in and once the initial frenzy passes, I expect markets will recognise this. Now it's over to Draghi to convince us otherwise.