ECB Tapers QE Exactly The Amount Expected

On Thursday the ECB released its plan for QE for 2018. It was exactly as expected as the bond buying was cut in half to 30 billion euros per month for 9 months and then lowered to nothing over the next three months. Draghi made some missteps this year with the way he handled guidance, but the lead up to this announcement and the decision were perfect. The best thing a central banker can do is deliver exactly what the market wants. It instills trust. If there was a surprise, the market wouldn’t know how to price future guidance because it wouldn’t trust his words. The table below breaks down the outlook for 2018. 9 months of 30 billion euros is 270 billion. The total is 330 billion euros so that means there will be 60 billion in purchases over the final 3 months. That’s the end of the program until another slowdown causes a need for more stimulus.

Personally, I think this process is being drawn out because the ECB never wants to stop buying bonds to help support the economy. The longer it goes, the greater chance a recession occurs before it’s over. The ECB clearly isn’t worried about interest rates being below zero before a recession because guidance is for no increases until 2019 at the earliest. Another theory is that the ECB hasn’t ended the program because inflation goals haven’t been met. My counter point to that theory is that the ECB shouldn’t taper QE at all if it thinks inflation won’t meet its goals in the next few years.

It’s also worth noting that the ECB clearly doesn’t care about the current rule which limits purchases to another 200 billion euros since this plan calls for another 330 billion euros in bond buying. Draghi didn’t explicitly rule out amending the rule which limits purchases to 33% of the European bonds. Maybe he didn’t want to make that announcement on Thursday that the rule was being amended, but it seems to me like a foregone conclusion.

The ratio of the total APP to the PSPP is similar to past purchases. It appears there was an equal decline of all the line items within the purchase program. This makes sense because the program will be ending in 12 months. That type of tapering hadn’t been tried before, so why start changing it right before the end?