Despite the eurozone economy recording rapid growth and the potential for that to continue over the next 6 years, the European Central Bank (ECB) president issued a warning that discussing anything close to scaling back the central bank’s aggressive programme of quantitative easing (QE) would be a grave mistake.
Draghi is under mounting pressure, especially from Germany, to begin winding down QE. However, he is of the opinion that as much as the eurozone is solid, inflationary pressures are yet to convince any positive outcome.
But the German hawks will have none of that, believing Draghi is overly protective. They claim that the longer he delays withdrawing monetary stimulus, the more he stores trouble for the future. This may necessitate more aggressive action should ECB fall behind the curve.
But ECB isn’t the only Central Bank in the world concerned that taking its foot off the stimulus pedal will be disastrous.
Bank of Japan Factor
The Bank of Japan held its policy meeting last Thursday in which it managed to convince financial markets that there is no need to rush in tapering the bank’s asset purchase programme despite the country’s economy showing an upward trend. Haruhiko Kuroda, The Bank of Japan Governor, said that if discussions were to start regarding quitting the QE would result into market confusion since it’s still too early.
The two heads of Central Banks are united by a common worthwhile fear, the fact that markets are likely to give a negative reaction to the withdrawal of monetary stimulus.
As much as international investors and traders follow guidelines set by world monetary leaders, they are not necessarily bound to behave in a manner feared by the central banks.
With increasing speculation regarding tapering of QE in Europe and Japan as well as tightening US monetary policy, the markets can be said to be exceptionally calm.
One sure thing is that CB’s are more worried about the markets as opposed to the vice versa.
That makes this time a more convenient to begin withdrawing monetary stimulus. But since the central banks, including the Federal Reserve Bank, are aware of the normalizing policy too quickly indicates the extent to which policymakers remain fearful of destabilizing markets.
Even the central bankers’ bank, the Bank for International Settlements (BIS), had foreseen such a happening in its 2014 annual report. Back then it warned policy makers of the likelihood to be boxed by worries of provoking a severe sell-off.
As much as markets are buoyant right now, that shouldn’t be translated to mean exit from QE will happen smoothly. Looking into the 2013 taper tantrum says it all.