“Today’s decision to end QE, albeit by providing a short extension to the end of year, ends months of communication ambiguity by the ECB and second guessing by markets. Moreover, the clear message that policy rates will remain at their present level “at least through the summer of next year” strengthens forward guidance on interest rates with an explicit display of pre-commitment by the ECB, designed to avoid the “taper tantrum” seen in the US in 2013 when QE was initially scaled back and market expectations of pending US interest rate hikes over-reacted.
The ECB seems to be discounting recent soft activity data quite significantly, confident that the economy will continue growing above trend and hence the output gap will close, putting gradual upward pressure on core inflation. The recent pick-up in wage inflation has probably helped them reach this judgement.
Following on the heels of the Fed’s change in messaging last night this is quite a big day for policy normalisation — the end of global QE is nigh.”
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