Mario Draghi, president of the European Central Bank. Picture: REUTERS
Mario Draghi, president of the European Central Bank. Picture: REUTERS

Mario Draghi had an even more delicate task than usual this month in explaining the European Central Bank’s (ECB’s) decision to scale back and prolong its asset purchase programme. The ECB president is under pressure from critics of ultraloose monetary policy, in the governing council and in Berlin. Yet eurozone inflation is still well short of target, and the bloc’s economic recovery remains weak and uneven. In an environment of rising global bond yields, investors are increasingly sensitive to the risk of political upheaval in the coming year.

In this context, there are clear political advantages to the decision to cut the ECB’s monthly bond buying from €80bn to €60bn from next April, when the programme is set to end. However, the economic rationale for the decision is much less persuasive. Draghi contends that it does not mean the ECB is preparing its exit from quantitative easing — indeed, he says such a "tapering" to zero was not even discussed, and insists the governing council remains ready to increase asset purchases again if circumstances warrant.

Nonetheless, this is clearly a reduction in the level of stimulus. Investors, who were already expecting the ECB to prolong quantitative easing, appear to have drawn that inference. Short-dated bonds rallied on the news that the ECB would lift restrictions on buying debt with low yields. But yields on longer-dated sovereign debt have risen.

The justification Draghi offers is that the risk of outright deflation has receded since March, when the ECB set the level of purchases at €80bn. This is true, but it does not make it the right time for the central bank to scale back its support for the eurozone economy.

A recovery is under way, but it remains a modest one by historical standards. The central bank will need to be alert to the dangers of heading to the exit too early.

Financial Times London, December 9

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