Europe’s Central Bank has been where the BoJ is today and has begun to
achieve what Japan’s central bank is aiming for. Its main task now is
preparing markets for the removal of the drip. ECB President Mario
Draghi has been reluctant to force the economy into the monetary
equivalent of cold Turkey. Hence, only some largesse has been removed so
far. But €30bn a month—half the prior rate—of bond buys is also
becoming difficult to justify as growth gears up. Bond purchases won’t
end yet though. So the market is tuned to ‘forward guidance’—verbal
commentary— shifting focus to the ECB’s zero-to-negative rates. The
rationale is that the bank must first stop talking about bonds and start
talking about rates in order to exit asset buying entirely. It takes
time. If bond buying ends with 2018, the ECB will regard that as a win.
Rates won’t rise on Thursday or anytime soon. The euro might advance
further into recent three-year highs though, if that guidance hint is
forthcoming.
