ECB’s Nowotny unveils probable tapering path

Austrian central bank governor, a prominent member of the European Central Bank’s (ECB) governing council, Ewald Nowotny signaled how the central bank might approach a reversal in its easy monetary policy under which the deposit rate is set at -40 basis points coupled with asset purchases of €60 billion per month.

Speaking at a conference yesterday, Mr. Nowotny said that With economic growth picking up strength and the threat of deflation gone, the ECB has room to claw back stimulus but only moderately since inflation remains far below its target of close to 2 percent and wage growth is still muted. According to him, the central bank needs to adopt a careful flexible approach in a reduction of its extraordinary stimulus. He said, “"When I say that it is reasonable to ease up on the accelerator, I mean and I think the Bundesbank has the same point of view that we can slightly reduce the volume of asset buys……It means you don't step hard on the brake, so I do not assume that [QE] will end at the end of the year without replacement".

He added that while the negative rates were necessary instruments, it might distort markets, which is a dangerous phenomenon and the governing council will decide this autumn on how to deal with the issue.

While it means that there is still ample time left before ECB truly turns hawkish in terms of policy, the speculative forces in the market have pushed the single currency to the highest level since October 2015.

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