The ECB has apparently started to discuss tapering. However, for the time being, this discussion remains of a theoretical nature.
Yesterday, late afternoon, Bloomberg came out with a headline that surprised many market participants. According to Bloomberg, the ECB would “probably gradually wind down bond purchases before the conclusion of quantitative easing, and may do so in steps of 10 billion euros a month”. Immediately, the euro strengthened and German bond yields moved up. However, what at first glance looked like an exciting scoop, even a bombshell, should be put into perspective at a second glance.
In our view, the Bloomberg story looks more like a combination of a trial balloon and stating the obvious, namely that QE would never stop with a Big Bang but with gradual tapering. This line of reasoning was also confirmed by the Bloomberg story which quotes unnamed ECB officials saying that “they didn’t exclude that QE could still be extended past the current end-date of March 2017 at the full pace of 80 billion euros a month”. At the same time, testing market reactions to trial balloons is not new to the ECB. The Fed experience with a too early announcement of tapering, however, should still be a good warning to the ECB not to start these tests too early. The most interesting twist to such a trial balloon could ironically be that higher bond yields in a market reaction to tapering speculations could solve the ECB’s scarcity problem.
We stick to our base case scenario that the ECB will extend its QE programme, probably at the December meeting. Some technical tweaks to the programme at the October meeting to tackle the scarcity problem would be a clear hint at the ECB’s willingness to go beyond March 2017. At the same time, yesterday’s report illustrates that an extension of QE does not necessarily have to come at the current monthly pace of 80bn euro.
In sum, yesterday’s Bloomberg story fits into the recent picture previously painted by ECB officials that the ECB has not much appetite for further monetary easing. To the contrary, it is one of these first tender reminders that everything can come to an end (sometime) – even QE.