Draghi’s Tapering Message Not Resonating With Bond Markets

The beatings will continue until morale improves, the saying goes. That’s one interpretation of the European Central Bank’s somewhat convoluted rejig of its quantitative easing program this week.

By insisting he’s not tapering bond buying while simultaneously reducing the monthly purchases and extending the time frame, President Mario Draghi is sending a mixed message that likely reflects disagreements among his Governing Council members. Cutting the program to 60 billion euros ($64 billion) per month from 80 billion euros throws a bone to those who worry that it’s time to withdraw the monetary medicine; lengthening the timeline until the end of next year pacifies policy makers who fear the patient isn’t yet on the road to recovery.

But in financial markets, bond yields are effectively tightening monetary conditions on the central bank’s behalf, suggesting investors are beginning to anticipate an improved economic outlook. That could play out in two ways: Either bonds are correct, and the ECB will find itself tapering properly next year, or bonds are wrong, in which case Draghi will have to make good on his pledge to do more if needed.


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Craig Erlam

Craig Erlam

Senior Currency Analyst at OANDA
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the Wall Street Journal and The Telegraph, and he also appears regularly as a guest commentator on networks including Sky News, Bloomberg, CNBC and BBC. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.