Next Up for the ECB: Preparing Markets for QE Phase-Out
Don’t expect any monetary-policy decisions to be made at the European Central Bank’s meeting on 8 March, says Franck Dixmier. But the bank is likely to clarify its forward guidance to announce that it will no longer link the continuation of QE with inflation, which has remained stubbornly low.
Inflation in the euro zone may be low, but robust economic growth suggests strong growth prospects for the region in the coming months. This makes the European Central Bank’s cautious monetary-policy stance seem increasingly less justified.
We believe that a high degree of economic confidence for the euro zone will lead the ECB to hike rates next year, even though inflation will likely remain far from the bank’s price-stability objective. Investors seem to agree: the markets are finally anticipating an initial rate rise to occur in the middle of the first half of 2019.
Before that, however, we expect the central bank to turn its attention to its asset-purchase program. Admittedly, monetary conditions have tightened over the last six months, under the impact of a stronger euro and higher long-term interest rates. But this doesn’t support the continuation of quantitative easing (QE) in our view, particularly with economic growth expected to remain above potential in 2018.
Therefore, the immediate challenge for the ECB is to adjust its communication to best prepare investors to face the upcoming end of QE. As a result, we expect the ECB to shift its forward guidance at its March meeting, making it clear that the bank will no longer tie the continuation of QE to inflation. After that, we anticipate that a QE phase-out schedule will be provided before the summer.
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