ECB may start tweaking policy message in early 2018

The European Central Bank should revisit its communication stance in early 2018, accounts of its December meeting showed, suggesting that policymakers could soon start preparing markets for the end of the bank’s massive stimulus scheme.

With the euro zone seeing its best growth in a decade, the ECB should gradually shift its stance to avoid a more disruptive move later and should look at a broader revision of its policy guidance to reduce the focus on bond purchases and raise the emphasis on interest rates, the accounts showed.

The euro surged more than half of a percent against the dollar on the comments, with investors taking the relatively hawkish statement as a further signal that the ECB will wind down its 2.55 trillion euro bond purchase scheme this year if growth continues to roar ahead.

“The language pertaining to various dimensions of the monetary policy stance and forward guidance could be revisited early in the coming year,” the accounts showed, referring to 2018. “The view was widely shared that… communication would need to evolve gradually, without a change in sequencing.”

Sidelining his critics, ECB President Mario Draghi stuck to his pledge last month to keep money pouring into the euro zone economy for as long as needed, despite improved growth and inflation prospects.


But growth is into its fifth year, employment is at a record high and convergence between the 19-member currency bloc’s core and periphery has restarted, all pointing to unabated growth and a declining need for central bank help.

Indeed, while policymakers suggested a gradual and careful shift, they argued for a guidance comprising the broader policy stance, a move that would signal the declining importance of bond buys and seen by some as a precursor to ending asset buys.

“As progress was made toward a sustained adjustment in the path of inflation, the relative importance of the forward guidance on policy rates would increase,” policymakers said.

With euro zone output eliminating spare capacity this year, policymakers argued that no further easing in financial conditions was needed, and some even warned about the ECB falling behind the curve.

“It was important for the forward guidance to be updated in line with evolving data with a view to avoiding more abrupt or disorderly adjustments at a later stage,” the ECB said.

Some policymakers are already openly discussing life after the quantitative easing scheme ends, suggesting growing support for a decision to wind down the programme later this year.

The accounts suggested the first change might be dropping a pledge to buy bonds until inflation heads back to target.

Launched three years ago, the asset purchases depressed borrowing costs, staving off the threat of deflation and putting growth on its best run since before the bloc’s debt crisis.

But critics say that the scheme has run its course and in a period of above trend growth, artificially low borrowing costs risk more damage than good by inflating asset price bubbles.

Running at 30 billion euros per month at least until the end of September, the bond buys are expected by investors to end this autumn after a brief tapering period. But interest rates, still well into negative territory, are not expected to rise until around mid-2019.


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell