Macro & Central BanksTaperSlowing Asset Purchases
Tapering
Gradually reducing the pace of a central bank's asset purchases, which is still easing, just less of it each month.
What Tapering means
Tapering means slowing the monthly pace at which a central bank buys assets under a quantitative easing programme, usually along a preannounced schedule until purchases reach zero. It is an important distinction that tapering is not tightening: while the taper is under way the balance sheet is still growing and the central bank is still adding accommodation, merely at a decreasing rate. Only after purchases stop and the portfolio begins to shrink does policy move into quantitative tightening. Tapering is generally treated as the first step in a longer normalisation sequence.
Markets nonetheless react to tapering as a signal about the path ahead, because the decision to slow purchases implies the central bank has become more confident about growth and inflation. That typically lifts yields and supports the currency. The classic caveat is the taper tantrum problem: if the announcement surprises markets that were positioned for indefinite support, yields can gap higher and capital can flood out of emerging markets, so central banks now telegraph tapering far in advance to avoid a disorderly repricing.
Worked example
A central bank that reduces monthly purchases from 80 billion to 60 billion is still easing, but the currency often rallies anyway because traders read the change as the start of a path toward rate hikes. Illustrative example.
Related terms
- Quantitative Easing (QE)Large-scale central bank purchases of financial assets, paid for with newly created reserves, used to ease policy once rates are near zero.
- Quantitative Tightening (QT)The reverse of quantitative easing: a central bank shrinking its asset holdings, usually by letting bonds mature without reinvesting.
- Central BankThe public institution responsible for a currency's monetary policy, issuance and financial stability.
- HawkishDescribes a policymaker or statement that leans toward tighter monetary policy to contain inflation, which is usually currency-positive.
Frequently asked questions
What does Tapering mean in forex trading?
Gradually reducing the pace of a central bank's asset purchases, which is still easing, just less of it each month.
How does Tapering work in practice?
Markets nonetheless react to tapering as a signal about the path ahead, because the decision to slow purchases implies the central bank has become more confident about growth and inflation. That typically lifts yields and supports the currency. The classic caveat is the taper tantrum problem: if the announcement surprises markets that were positioned for indefinite support, yields can gap higher and capital can flood out of emerging markets, so central banks now telegraph tapering far in advance to avoid a disorderly repricing.
What is an example of Tapering?
A central bank that reduces monthly purchases from 80 billion to 60 billion is still easing, but the currency often rallies anyway because traders read the change as the start of a path toward rate hikes. Illustrative example.
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