‘The Lady Isn't Tapering.’ But Ask Again in December

(Bloomberg Opinion) -- The European Central Bank has made a very small down payment on a prolonged economic recovery, one durable enough to withstand Covid-19's troubling variants and any other pandemic developments. But the big decision-making comes in December, when the central bank undertakes a comprehensive review of its bond-buying program, with a few more months of delta under its belt and a better sense of direction about the Federal Reserve’s withdrawal of stimulus. There will be less room to fudge the messaging. 

On Thursday, the ECB said it would slow the pace of bond-buying in the last quarter of the year. The announcement prompted a lot of hand-wringing over what a “moderately lower pace” of asset purchases really means, and whether it constitutes a taper — that is, a discernible reduction in stimulus. President Christine Lagarde told reporters, “The lady isn't tapering.” Some investors were more skeptical, arguing that it isn’t the official spin but the end result that matters.  

The bank is still providing very significant support to the economy and will for a long time. If it's going to be a bit less — say, 70 billion euros ($83 billion), as opposed to roughly 80 billion in the past two quarters — that doesn't alter the equation dramatically. The bank is committed to spending 1.85 trillion euros until at least the end of March, in addition to an older program of quantitative easing.

It might have been helpful for the ECB to offer a numeric figure, but specificity is the last thing it wants when the times call for nimbleness. Explicit parameters also might have compromised Lagarde’s “recalibration” and made it harder to deny it amounts to tapering. While the global economy is in a better state than it was a year ago, it’s far from fully healed and some private-sector forecasts have been trimmed as delta rages. The ECB upgraded its growth forecast for this year, and pulled it down slightly for 2022. Inflation is projected to be well below the ECB’s target next year and in 2023.

December's meeting of the ECB's governing council will be less amenable to artful linguistics. Many economists had considered the year-end an unofficial deadline for clarity from Fed Chair Jerome Powell — either to start scaling back QE or announce the intention to do so. If that timeline gets pushed back, it suggests the engine of the global recovery isn't in such great shape. All central banks, including the ECB, say they make their own decisions without taking marching orders from the Fed, but they can't ignore the first among equals.

Thursday’s compromise likely appealed to Lagarde for another reason: the need to balance hawks and doves. To keep the broader program on track, she probably felt the need to give some concessions to those who want to withdraw accommodation early. The Dutch and Austrian central bankers were among the most outspoken in this regard. Historically, both institutions have been in the orbit of Germany's Bundesbank, which carved out a role in the ECB's early years as a defender of tight money and is still skeptical about ultra-loose policy. A succession of Bundesbank officials, and those of similar minds, have been a kind of noisy backbench. They can always be outvoted, but they can make trouble in the press and other public forums. 

December is shaping up as quite the month for central banking. Before Lagarde can say something is clearly a taper, she has to feel confident enough that delta will behave. That’s a big call, and something she can’t control. The end of QE looks like a distant prospect, if it comes at all. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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