European Central Bank Takes a Cautious Step. A Little Too Cautious.

(Bloomberg View) -- Call it the taper that's not really a taper.

The European Central Bank was right to take advantage of the stronger economy to reduce the value of bonds it purchases, the stimulus known as quantitative easing. The ECB's decision was greatly aided by the approaching end of the current QE program on Dec. 31, so it had to do something.

Bond purchases aimed at keeping interest rates ultra-low will be 30 billion euros a month, down from the current 60 billion. That looks like a decent cut, given the economic expansion now underway. Look a little closer and the new arrangement is softened by a big caveat that QE can again pick up if circumstances warrant.

So today's progress in easing stimulus isn't the end of the story. Nor is the direction of policy set in stone. Nod at a better economy and the receding threat of deflation, while keeping your options wide open. That way no investor gets scared about a disruption along the lines of the American taper tantrum during Ben Bernanke's time as head of the Federal Reserve. Neat.

Just so the message is clear, the ECB statement said its benchmark interest rates will stay at zero until well past the ultimate end of QE, whenever that may be. And proceeds from maturing bonds it already bought will be reinvested for an "extended period."

It's a pity policy makers chose to be so careful in the decisions that decorate the taper. This reduced amount of 30 billion a month will last through September. Based on how things look now, that might be a good opportunity to act with more confidence and end the purchases entirely. That would be more meaningful. For nervous nellies, they can keep the language about low rates.

President Mario Draghi and the ECB governing council are understandably cautious. Inflation in the euro zone, like in the U.S., is still missing. They may also be haunted by Jean-Claude Trichet's decisions as Draghi's predecessor. Back in 2008, the ECB raised interest rates shortly before Lehman Brothers Holdings Inc. failed. A rather embarrassing U-turn ensued. Arguably, Trichet then tightened too quickly in 2011, and a further relaxation had to follow.

Nobody is predicting a crisis now. Far from it. Draghi is right to point to the need for easy financing conditions being necessary for inflation to get back to target: below, but close to, 2 percent. The core rate of inflation, which excludes food and energy, is 1.1 percent. The so-called headline rate is 1.5 percent. Not deflation, which was the big scare, but also a ways to go to get to target.

I have urged a taper before, given the relative bounce in the global and European economies, especially Germany. Today's decision is a step in the right direction. Next time the ECB should cut stimulus without so many asterisks.

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

Daniel Moss writes and edits articles on economics for Bloomberg View. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

To contact the author of this story: Daniel Moss at dmoss@bloomberg.net.

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