(The opinions expressed here are those of the author, a
columnist for Reuters)
By James Saft
Dec 8 Forget the redefinitions, the European
Central Bank is tapering and for good if not happy reasons.
Good in the sense of being its best available option, but
those options are not, on the whole, happy ones.
The ECB on Thursday said it would shave 20 billion euros per
month off of its asset purchases starting in April, though it
gave itself the option, one it surely already had, of increasing
again from 60 billion euros afterwards should it see fit.
There could be "no question" of calling this a tapering, ECB
chief Mario Draghi said, citing the novel argument that it did
not qualify as they did not intend to take purchases down to
zero. Draghi's ultimate intentions, which he himself admits are
uncertain, don't come into it: the pace of bond buying will
diminish and that, dear friends, is a taper.
More interesting than the word games are the limitations on
ECB actions which look to have motivated what it is actually
doing, as opposed to what it may some day do or how it would
like its actions to be characterized.
Though the central bank gave itself the freedom to buy lower
yielding and sooner maturing bonds it will soon run up against a
ceiling of its own making - that the ECB shall not buy more than
a third of a given country's sovereign debt or more of its debt
than that nation's share of euro zone output.
This leaves Draghi twisting himself, and policy, into knots
in order to try to at least avoid the appearance of violating
the cardinal rule of central banking: thou shalt not show
"Under no circumstance can the ECB or indeed any other
central bank admit that it cannot do 'whatever it takes' ...
Unfortunately, even if tacitly, that is exactly what the ECB did
today," Marc Ostwald of ADM Investors Services wrote to clients.
"The contention that if necessary, the QE program could be
increased to 80 billion euros again is part of the rhetorical
camouflage, but it is too easy to see through."
Remember that Draghi is tapering bond buys, or winnowing
them if you prefer, at exactly the same moment as his own staff
is projecting that euro zone inflation will average 1.7 percent
in 2019, a level he himself characterized as "not really" close
to the official goal of a bit under 2 percent.
The fact that the ECB might later change course or buy other
assets does little to convince that inflation will soon answer
to its commands.
POLICY HAS LIMITS
And it isn't simply operational reasons which bedevil ECB
plans to support the euro zone economy by buying up assets. QE
works quite well when markets are in a seriously impaired state,
such as towards the beginning of the financial crisis.
For some time now the question facing would-be euro zone
borrowers isn't so much if they can borrow money - they can, and
quite cheaply - but if they can profitably put those funds to
work. That question is simply less amenable to monetary policy.
At best it needs fundamental support through structural reform,
something Draghi always stresses, or at least it requires
shorter term encouragement via greater government spending.
The longer we go without a strong recovery in inflation
while running a very large QE policy and negative interest rates
the worse the tradeoffs on this policy become.
"The reality, which we have observed before, is that
monetary policy has very likely reached its limits," Stefan
Isaacs of M&G Investments wrote to clients.
"For all the rhetoric that central banks will espouse to the
contrary, the reality is that we have reached a tipping point.
For each additional measure of monetary stimulus there is an
equal or greater cost to be borne elsewhere in the economy -
banks, insurers and savers the obvious losers."
In this respect, the Federal Reserve and President-elect
Donald Trump are providing the ECB with some very useful
For now, at least, the market has decided that Trump will
run an inflationary and expansionary fiscal policy, a belief
that's led to a rapid increase in future inflation expectations,
and with it an appreciation of the dollar. The Fed will, almost
certainly, raise benchmark U.S. interest rates next week and may
well signal a steeper pace of hikes in the months to come.
A steepening global yield curve will help euro zone banks
and insurers and will also flatter the outlook for retirement
savers, whose future liabilities look bigger at lower
longer-term yields. Best of all for the ECB is a stronger
dollar, which may deal pain to emerging markets and those who
need to attract capital flows, but will help euro zone
Thursday may have been an uncomfortable time for the ECB to
say it was tapering, but it was as good a chance as it may get
to do it anyway.
(Editing by James Dalgleish)