ECB will tap the brakes sooner than you think, and that will shake markets, Citi says

Brace yourself, the European Central Bank will taper its bond-buying program sooner than you think, say economists at Citigroup.

The announcement could come as soon as next month, they said. In a note out late Thursday, the Wall Street bank said it expects the European Central Bank, at its Dec. 8 meeting, to extend its quantitative easing program beyond its current March end date. But they also expect the ECB to announce that it scale back its purchases to €60 billion ($66.70 billion) a month beginning in April. The bank currently buys €80 billion a month.

“We expect this to mark the start of the ECB’s tapering strategy, even if we estimate that QE will last 18 months beyond March 2017, worth an extra €700bn (5.5% of GDP),” the economists said.

They said there is an increasing need for tapering as the ECB’s loose monetary policy has started to lift inflation and improve financial conditions, which were among aims of the program. Additionally, scarcity of eligible bonds and negative side effects—such as the damage to bank profitability—are also reasons to start winding the program down, Citi explained.

“We think that this earlier tapering of asset purchases than the market probably anticipates will result in euro/dollar eventually being more likely to break higher from the $1.05-$1.15 range than lower,” the economists said.

The euro EURUSD, +0.3061%  on Friday bought $1.1105, up a little more than 1% this week, mainly due to dollar weakness in the run-up to the U.S. presidential election next week.

The notion of an early ECB tapering decision was first floated in early October, when Bloomberg said a consensus was building at the Governing Council for scaling back the bond purchases. However, when pressed on the question after the monetary-policy meeting on Oct. 20 central bank President Mario Draghi denied there had been any discussions about tapering during the deliberations. He also said there had been no discussion about extending the easing program.

“Yet, the absence of formal discussions around the QE timetable has not stopped some of the most hawkish GC members from expressing their preference for purchases to stop (or to be scaled down) as quickly as possible,” the Citi team said.

Source: MarketWatch

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