16 NOV

2017

Macro , Topics

European central bank... following in the Fed's footsteps ?

In a progressively improving European economic environment in which Eurozone growth is climbing steadily to the 2.5% year-on-year mark, the European Central Bank (ECB) has announced a recalibration of the amount of its monthly asset purchases: as of January 2018 it will purchase – until at least September of that year – at a monthly pace of €30 billion, as opposed to the current €60 billion. The Bank has, of course, kept its benchmark rates unchanged.

Unlike events in the US in 2013, the ECB announcement went down rather well with market operators.

In May 2013, the statement made by Ben Bernanke – the then-chairman of the Federal Reserve, on the latter’s reduction in the pace of its asset purchases – sent long-term interest rates rocketing. Taken aback by the market reaction, the Fed put off asset-purchase reductions until January 2014… only to bring the reduction process to a halt a mere 10 months later. A further 14 months would elapse before it raised its key indicator for the first time (December 2015)… and twelve more before the second hike (Figure 1).

The ECB learned a lot from this. It first took care to specify that it would not abruptly bring its programme to a halt in September 2018, adding that it might even extend the purchasing period if economic or financial conditions warranted it. It placed particular emphasis on the fact that it would probably only raise rates well after the expiry of its QE programme, adding, too, that it would continue to re-invest maturing securities.

In short, Eurozone monetary conditions should therefore remain highly propitious at least until the spring of 2019: just as in the US, the first rate hike will, finally, only occur two years after the start of "tapering"