The somewhat ambivalent approach to today’s ECB meeting is a sign of just how dead monetary policy is. We can’t quite leave behind the lower-forever days that consumed us for most of this year, but we face an ECB who might both extend QE and announce when it might be stopping, all at the same time. Even in October, sources were leaking that a taper was being discussed, then last week we got the Reuters story quoting sources:
“Coupled with the extension, there’s a sense that you need to send a signal, also for the hawks, that we will not be in the QE (quantitative easing) business forever,” one of the sources said. “We’re not talking about tapering. We’re talking about a signal.”
OK so not a taper, but at the least it’s an end to QE forever. Or even lower-for-longer. Or even, in fact, the relevance of monetary policy at all, when inflation is coming back. Indeed, the ECB hawks will surely be flagging up one of Draghi’s favourite charts, which shows how inflation expectations have skyrocketed since the start of November, now up at the highs of the year:
That’s in stark contrast to the deflationary despair of the summer, when this measure hit 1.25%. Now up at 1.68%, that’s heading jolly near to the ECB’s mandated target of “below, but close to, 2%”. And yet the world still acts as if the ECB is locked in a deflationary quagmire death spiral of doom. All the negativity over the Eurozone for the past 5 years casts a long shadow. Sure, there are political risks ahead, and sure, this is just inflation expectations, not actual growth, BUT… the world needs to wake up and come to its senses that the interest rate picture has changed. Even if the ECB were to extend QE and not talk about a taper today, it’s quite evident from the leaked discussions that an end to QE is in sight. Even if they were to cut the deposit rate, wouldn’t that just serve to steepen the yield curve, restoring strength to financials?
QE is a busted flush.
It’s no longer Hands Up if you’re Easing, but Let Us Know when you Might Start Hiking… as shown by RBNZ Governor Wheeler overnight. In his bullish speech he was pretty clear that they are done with cutting interest rates:
‘The latest developments “do not cause us to change our view,” … “We expect monetary policy to continue to be accommodative, and that the projected policy settings will help generate sufficient growth to have inflation settle near the middle of the target range.”’
Interest rate hikes are now creeping into the yield curves of Australia and NZ for the second half of next year.
And so whatever happens today we are at a turning point. The monetary policy emperor really does have no clothes.