Draghi treads carefully to avoid Taper Tantrum 2.0

Draghi treads carefully to avoid Taper Tantrum 2.0

Markets cheered yesterday's move by European Central Bank president Mario Draghi to scale back the vast quantitative easing programme but extend its length well into 2018, which seemed to please both hawks and doves with its ‘lower for longer’ approach.

In the ECB’s October meeting, Mr Draghi said he will scale down the monthly asset purchase programme from €60bn a month to €30bn from January 2018.

He clarified that the bank will also continue reinvesting the proceeds of its bond purchases for “as long as necessary”, in line with what the US Federal Reserve is doing. He also kept interest rates on hold.

The euro fell against other major currencies, helping to lift stock markets, while government bond yields fell slightly after the announcement.

Ian Stewart, chief economist at Deloitte, described said the move as a gentle approach to tapering.

“This is softly, softly tapering. William McChesney Martin, a previous Fed Chairman, once said that the job of the Fed was ‘to take away the punchbowl just as the party gets going.’

"The ECB certainly isn’t taking away the punchbowl, [but] Mr Draghi is saying that so long as everyone keeps having a good time they plan to put less punch in.”

Silvia Dall'Angelo, senior economist at Hermes Investment Management, said this is the beginning of the end for the QE in the eurozone.

“While the ECB retained the flexibility to provide further extensions in future, this move is likely to mark the closing stage of the ECB QE programme launched in early 2015.

“Even with tapering, the overall monetary policy setting will remain highly accommodative over the next couple of years.

"After all, tapering still implies that the ECB balance sheet will continue to grow over 2018, only at a slower pace.

"The [asset purchase programme] is now poised to increase from around €2.2trn currently to almost €2.6trn by September 2018, around 23 per cent of current GDP.”

He added that the reinvestment of bonds for what Draghi said would be “an extended period” means that the ECB’s balance sheet will remain large, and that asset purchases could be stepped up in future in case the economic outlook worsened.

Schroders’ chief European economist Azad Zangana, thinks a rate rise is now on the cards for the first half of 2019.

On the issue of inflation, Nancy Curtin, chief investment officer at Close Brothers Asset Management, argued there are signs it is picking up, dampening down the spectre of disinflation.

“This slow, steady and widely predicted approach hopes to rein in the euro from rising further, which is limiting the earnings capacity of European exporters, at the same time as avoiding a European taper tantrum in the markets. Whether one can be achieved without the other remains to be seen,” she said.

“Strong economic growth both within and outside of the eurozone has helped ease the central bank into this decision.  Recent signs of inflation picking up, and a soft exit from quantitative easing should allay investors’ concerns around the prospect of severe disinflation.”