The European Central Bank indicated Thursday that it might move sooner than investors had expected to phase out its giant bond-buying program, sending the single-currency and eurozone government bonds higher.
The ECB’s change of course comes amid a sharp rebound across the 19-nation eurozone economy, which has sparked a public dispute among top ECB officials over whether their stimulus policies have become too aggressive.
The minutes of the bank’s December policy meeting, published on Thursday, show that officials considered a move “early in the coming year” to further reduce the stimulus, assuming economic growth remains strong.
Specifically, the ECB might soften its pledge to continue its EUR2.5 trillion bond-buying program, known as quantitative easing, until inflation reaches its target of just below 2%.
The news came as something of a surprise to investors because ECB President Mario Draghi gave no indication after the bank’s December meeting that its policy mix might soon change.
The euro jumped against the dollar to $1.2051 after the minutes were published, while the yield on 10-year German government bonds surged above 0.5%.
The change had been anticipated by analysts but it came “sooner than we would have assumed,” said Jennifer McKeown, an economist with Capital Economics in London.
The minutes comes amid signs that the eurozone economy is in its best shape in more than a decade. Consumer sentiment is at its highest level since the turn of the century, unemployment is close to a nine-year low, and industrial production is booming, rising 1% on the month in November, according to data published Thursday by the European Union’s statistics agency.
In a nod to those developments, the ECB pledged to extend its QE program through September 2018 but at a greatly reduced pace of EUR30 billion ($36 billion) a month instead of EUR60 billion.
But that reduction wasn’t enough for some ECB officials. The governors of the Dutch and German central banks complained publicly that the ECB wasn’t moving decisively enough to end its crisis-era policies. Members of the bank’s six-member executive board voiced similar concerns.
The main rationale for QE has “ceased to exist” given there is no longer a risk of deflation, or a downward price spiral, said Klaas Knot, governor of the Dutch central bank, in November.
The minutes of the December meeting reveal growing support for that position. ECB officials “widely” agreed that the bank would need to change its guidance to investors, though they stressed the move should take place “gradually over time to avoid sudden and unwarranted movements in financial conditions.”
The concern is that, unless the ECB updates its guidance to investors to reflect evolving data, it will face more abrupt or disorderly adjustments in financial markets at a later stage.
One official complained at the meeting that a gap “appeared to be emerging between favorable economic conditions and a policy stance that remained in a crisis configuration.” Several officials “recalled their reservations concerning some elements of the decisions taken at the October monetary policy meeting.”
While policy makers were concerned that inflation–at just 1.4% in December–remains too weak, the minutes suggest they are increasingly confident price pressures will pick up as unemployment continues to fall.
“The ECB is increasingly focused on growth and seems to regard inflation only as a derivative of growth developments,” said Carsten Brzeski, an economist with ING in Frankfurt.
The ECB’s next move–perhaps as soon as its Jan. 25 policy meeting–might be to drop a pledge to accelerate its bond purchases if the economy deteriorates, said Ms. McKeown. After that, the bank may soon signal that QE won’t continue much beyond September, if at all, she added.
Still, with inflation so weak, the ECB is probably some way from following the Federal Reserve in hiking interest rates, analysts said.
Source: Dow Jones