EUR Surges On Report ECB Near Consensus To Taper QE Before Its End

It has been a rollercoaster ride for stocks so far, and just as ES was ramping back to intraday highs, moments ago Bloomberg blasted a headline which surprised market watchers, according to which none other than the ECB may follow the BOJ in tapering its QE next.

  • ECB SAID TO NEAR CONSENSUS ON NEED TO TAPER QE BEFORE IT ENDS
  • ECB QE TAPERING SCENARIOS SAID TO INCLUDE SLOWING BY EU10B/MTH
  • ECB TIMING ON TAPERING SAID TO DEPEND ON ECONOMIC OUTLOOK

As Bloomberg notes, there is an informal consensus among ECB policy makers is that QE will need to be wound down gradually when decision is taken to end the program, say people familiar with the matter.

One scenario is to taper QE in steps of EU10b/month, BBG's "sources", who are most likely ECB insiders testing the market reaction to this particular trial balloon, adding that the decision on when to start tapering depends on economic outlook, program could still be extended beyond current end-date of March 2017 at full pace of EU80b/month. People ask not to be named as deliberations are confidential. Bloomberg also notes that the Governing Council has not discussed the future path of QE, ECB says in a statement.

Some more details:

The Governing Council, which is holding an interim meeting on Tuesday before members go to the International Monetary Fund in Washington, has just four policy-setting sessions left until the currently scheduled expiry of QE. Since Sept. 3, when officials kept their stimulus package unchanged and left the question unresolved of whether bond purchases will be extended, investors have been left guessing on when and how the program will end.

 

“The Governing Council has not discussed these topics, as President Mario Draghi said at the last press conference and during his recent testimony at the European Parliament,” the ECB said in an e-mailed statement.

 

Tapering by as much as 10 billion euros a month would mean following a similar strategy to the U.S. Federal Reserve, which started reducing its monthly bond purchases by $10 billion in December 2013 and ended them in October 2014, as a way of minimizing market disruption.

 

Even when QE finishes, the ECB’s balance sheet won’t shrink immediately. The central bank has already committed to reinvest the cash from maturing bonds. That means the stimulus effect will be maintained until the end of 2020, Dutch central bank governor Klaas Knot said last month.

 

The discussions will also be influenced by a weariness in recent months about the burden that the ECB has had to carry. Officials are so concerned that governments are wasting the opportunity of ultra-loose monetary policy to make structural adjustments that they’ve set up a task force on economic reforms to consider the impact of various fiscal strategies.

The BBG report follow a previous report from WSJ that the ECB appears to be cooling on a signature policy: negative interest rates. Over the past 24 hours, two senior ECB officials have warned that subzero rates could, over time, cause banks to reduce lending to the economy. That is the opposite of what the central bank hopes to achieve with its easy-money policies.

The ECB had until recently stressed the benefits of negative interest rates, which it introduced in mid-2014, and carefully left open the door to a fresh rate cut.

 

The shift in emphasis comes amid a protracted slump in European bank stocks, which have fallen around 20% this year as investors worry about their future profitability in an environment of low interest rates.

 

That is a concern for central bankers in the region, the ECB's top economist Peter Praet said in Madrid on Tuesday, because of a "rather strong correlation" between equity prices and banks' lending.

 

"When equity prices are low, one year later, you may see impacts on the supply of credit of banks in general," Mr. Praet said.

While the Bloomberg report may be just the latest central bank trial balloon, the algos are not taking any chances, and has sent the EURUSD surging above 1.12 while EURGBP spiked to a three year high following the report.

Meanwhile the Bunds is as expected, tumbling, in what may be the ECB's own attempt to inspire a VaR shock, the same way the BOJ did three weeks ago before the market's most recent freak out.

To be sure, with yields on the long-end jumping, and NIM showing some modest signs of life, there will be at least one delighted party from today's trial balloon: Deutsche Bank, which lilke its Japanese peers, has been fighting tooth and nail against the ECB's NIRP policies. One almost wonders if perhaps DB is the source of the rumor...