ECB might be seriously confusing markets, but most bets suggest tightening in 2018

  • Euro has been volatile on the back of hopes that the ECB will reduce monetary stimulus next year
  • Analysts expect an announcement after the summer and tightening to kick off in January 2018
  • Timing for a first rate hike is uncertain.
A television monitor shows Mario Draghi, president of the European Central Bank (ECB), speaking during a news conference to discuss monetary policy in Tallinn, Estonia, on Thursday, June 8, 2017.
Peti Kollanyi | Bloomberg | Getty Images
A television monitor shows Mario Draghi, president of the European Central Bank (ECB), speaking during a news conference to discuss monetary policy in Tallinn, Estonia, on Thursday, June 8, 2017.

Investors and markets may have shown some confusion regarding the future policy of the European Central Bank this week, but they are certain that monetary stimulus will be reduced throughout 2018.

"The ECB/Draghi, indeed, have been creating some confusion lately," Elwin de Groot, senior market economist at Rabobank, told CNBC via email. He added that tapering is "unavoidable" from a technical point of view, but also economically speaking it does not make sense to extend the current quantitative easing program into next year.

The euro rose to a nine-day high against the dollar on Tuesday following remarks by ECB President Mario Draghi that the bank needed to be "prudent" when "gradually" updating its monetary policy. Currency traders interpreted such words as indications that the ECB is preparing to taper its stimulus.

However, shortly after, the euro turned lower following media reports citing sources that markets had misinterpreted Draghi and the bank was not considering to reduce its monetary stimulus just yet.

On Thursday morning, the euro was once again up against the dollar by 0.3 percent at $1.1412, after Draghi made new remarks without retracting any of the previous comments.

Despite the confusion, analysts are confident that monetary easing will be slowly reduced throughout 2018 with an announcement in the September or October meeting.

Tapering is coming but when?

"We expect that the ECB Council will announce a tapering decision at its September meeting, or in October at the latest," Michael Schubert, senior economist at Commerzbank, told CNBC via email.

He added that tapering is likely to start in January of next year and it will probably last a year, until December 2018.

John Hardy, head of forex strategy at Saxo bank, also told CNBC that "assuming that we don't have a growth slowdown or sharp drop in inflation if the euro rises especially rapidly," the ECB is likely to announce tapering in September for starting to actually slow down its purchases in early 2018.

"And then rate hikes to begin in the second half of 2018," he added.

However, the timing for the first rate hike isn't consensual. According to Reuters, 90 percent of currency traders expect a rate hike in the first half of next year, by July 2018.

"We feel that the first deposit rate hike is further away than markets are currently pricing in. We have the first deposit rate hike penciled in for early 2019," de Groot from Rabobank added.

Commerzbank's Schubert explained in an economic research note that Draghi has stated that a rate hike before the end of the asset purchase program is unlikely.

"A rate hike even before the end of the bond purchases, which is something the markets have repeatedly been speculating about, does not fit into this picture of a very gradual exit," he wrote following Draghi's remarks on Tuesday.

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