ECB Gets Its Messaging Right

The ECB’s decision in early December to reduce the monthly pace of its asset purchase program came as a surprise. But investors should draw considerable comfort from its commitment to maintain a “sustained presence” in euro-area markets.

The European Central Bank (ECB) delivered a carefully crafted message in the press conference that followed its December 8 policy-setting meeting. It surprised markets by announcing a reduction in the pace of its monthly asset purchases, from €80 billion to €60 billion from April 2017.

But to counter speculation that this might represent a “tapering” (or winding down) of its quantitative easing (QE) program, the ECB extended QE by a further nine months, to at least the end of December 2017. And it intends to pick up the pace of purchases again if deflationary pressures resurface in the euro area.


So an improvement in the economic backdrop since the monthly purchase pace was raised to €80 billion in March outweighed any potential ECB concerns about higher bond yields. The ECB was surprisingly relaxed about the latter, probably because the recent increase in nominal yields has been accompanied by rising inflation expectations—thus limiting the increase in real yields and tightening of financial conditions.

Nonetheless, ECB president Mario Draghi made it clear that one of the reasons for extending the program by nine months was to reassure investors that the ECB will remain a “sustained presence” in regional markets for some time to come.