11 January 2018

Financial Times: ECB joins central bank chorus hinting at faster tightening

The European Central Bank has indicated it is preparing to cut its crisis-era stimulus programme faster than anticipated, joining monetary policymakers in most developed economies in expressing increased confidence in the global economic recovery.

The signal, contained in minutes of the ECB’s December rate-setting meeting published, came just days after the Bank of Japan sent a similar message by disclosing it had purchased fewer bonds than investors had expected as part of its quantitative easing efforts.

The ECB’s language was characteristically subtle; instead of discussing the eurozone’s continued “recovery”, it referred to the bloc’s “expansion”. But the change of wording was enough to send the euro rallying nearly 1 per cent against the dollar and German bond yields rose to near two-year highs.

Mario Draghi, the ECB chief, set the bank’s current slow path of tapering its stimulus programme in October, when he announced he would cut bond buying in half to €30bn each month until September. Mr Draghi also vowed to hold borrowing costs at their current record lows until well after the ECB ends its bond buying. The bank has bought a total of €2.3tn of bonds since starting QE in early 2015.

But the minutes of the December 14 meeting showed Mr Draghi’s governing council was already reconsidering how the eurozone’s “continued robust and increasingly self-sustaining economic expansion” should weigh on its decision-making, saying the ECB should better communicate its confidence in the region’s growth.

“Looking ahead, the view was widely shared among members that the governing council’s communication would need to evolve gradually,” the account said. “The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year.”

Most ECB watchers still think QE will continue until September, but expectations of purchases continuing beyond that are diminishing.

Like the ECB, the Bank of England and the US Federal Reserve have said they expect to tighten their ultra-loose money policies in 2018 in the face of strengthening economic indicators, with the Fed saying it is likely to raise rates three times.

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