A busy few days lie ahead for the eurozone’s central bankers after a (unintended?) markets shake-up towards the end of last week.
Bullish comments from Mario Draghi, ECB president, on the central bank’s tentative confidence in meeting its inflation target hit bonds and bumped up the euro last Wednesday, sparking what has now been dubbed a “mini-taper tantrum”.
The prospect of the ECB taking away its extraordinary stimulus measures – which have been in place for over two years – sent the euro to a 2017 high and drove 10-year German Bund yields to a three-month high of 0.49 per cent. (Yields rise when prices fall).
The shake-out was not on the same scale as the Fed-induced taper tantrum of 2013. But the sharpness of the rally in the euro was enough to prompt ECB officials to dampen speculation of an imminent policy switch. That’s helped the single currency pull back over 0.4 per cent against the dollar today while yields across the eurozone are slipping.
Markets will now be keeping a close eye on a series of scheduled speeches from ECB officials this week – an opportunity for the central bank’s senior officials to backtrack or underline the possibility that easy money is coming to an end.
First up will be chief economist Peter Praet who is due to speak tomorrow. The usually dovish Mr Praet will be addressing an audience in Rome as part of a panel on the fixed income markets at 13.30 (BST).
He will be followed later in the day by executive board member Yves Mersch, while Germany’s hawkish Jens Weidmann will be speaking on Thursday, just ahead of the release of the minutes of the ECB’s latest policy meeting – when Mr Draghi ruled out the prospect of lowering rates from record levels.
Most analysts are expecting the central bank’s doves to come out in force to repeat that inflation remains below target while inflationary pressures are still subdued.
“Markets will be hanging onto the words of the ECB,” said Viraj Patel, FX strategist at ING.
Ken Wattret at TS Lombard notes the ECB’s communication has a new tricky balance to strike:
[The ECB] wants to avoid an excessive market reaction. But at the same time, it must get the message across that a policy adjustment is required.
He adds that Mr Draghi’s speech in the Portuguese mountain town of Sintra “should not have come as a total shock”:
June’s decision to remove the easing bias on policy rates despite low inflation, and the rationale behind the decision, should have been a warning to markets.
It was made clear that the decision reflected the diminished risk of deflation and increased confidence about the outlook for underlying inflation due to sustained above-trend growth and the declining unemployment rate.
Gilles Moec, Europe economist at Bank of America Merrill Lynch, thinks Mr Draghi’s intervention was intended to lay the groundwork for a tapering announcement due in the second half of the year.
With the ECB already facing pressures due to its capital key rulings (which limit bond holdings to 33 per cent of any member state country), Mr Moec expects a €20bn a month cutback on bond purchases from October. He forecasts QE will come to an end entirely by the end of 2018.