The European Central Bank (ECB) today revealed it may adopt a more positive tone on the recent strong expansion in the European economy, with investors taking the move as a hint that policymakers will consider winding back their massive stimulus programme.
The ECB’s policymakers could change “language pertaining to various dimensions of the monetary policy stance and forward guidance […] early in the coming year”, according to minutes from the account of the last monetary policy meeting.
The minutes showed a "very positive" growth outlook from the ECB's top economists, with a "prolonged period" of above-potential growth expected. The growth "increased the level of confidence" of ECB policymakers that inflation, long below target, will return to near but below two per cent.
The euro jumped in value against the US dollar after the minutes were released, gaining more than 0.8 per cent at the time of writing to hit highs of $1.2049, moving back towards three-year highs achieved at the start of the year.
Government bonds across the Eurozone were sold off after the release of the minutes, with French and German 10-year yields hitting their highest points since July and August respectively. Bond yields move inversely to prices.
In its monetary policy statements the ECB has so far remained committed to an accommodative monetary policy stance for an extended period of time. But the minutes hint at an adjustment to their attitude, as the European economy has defied all expectations in the last 12 months.
Ranko Berich, head of market analysis at foreign exchange firm Monex Europe, said: “The ECB is not about to turn hawkish overnight, but a move from unconditional assurance that policy will remain loose to a more data-dependent approach would nonetheless be a significant milestone on the path to normalisation.”
Economic growth in the Eurozone picked up markedly over 2017, avoiding a clutch of political obstacles to post growth of 2.6 per cent year-on-year in the third quarter.
The central bank left monetary policy unchanged at the mid-December meeting, but previously announced it would slow down its monthly purchases of bonds from €60bn to €30bn – an acknowledgement that less stimulus was needed.
The asset purchase programme, known as quantitative easing, has racked up €2.29 trillion in bonds on the ECB’s balance sheet since starting in 2015, with the plan currently only set to continue until the end of September.
Florian Hense, an economist at Berenberg, a German bank, said the minutes pave the way for the end of asset purchases in September.
“While the ECB will avoid any unwarranted tightening, it is reassuring to see that the ECB is becoming more confident about taking the next step in its exit strategy,” he said. “After all, accompanying the recovery requires less and less monetary stimulus as other factors are driving the economy.”