The European Central Bank (ECB) is slowly moving toward an exit to its massive bond-buying program as the economy is doing far better than expected, and more and more members of its Governing Council seem convinced that extra stimulus should be withdrawn sooner rather than later.
The ECB is unlikely to announce a clear timeline for its exit strategy in January, but many now expect it to come in the first six months of the year.
"The key thing to watch: Whether Draghi confirms the October statement that there will be no sudden end to QE (quantitative easing)," Carsten Brzeski, the chief economist of Germany and Austria at ING Diba, said in a research note. "We expect him to do so as this would be the only way – at least temporarily – to get the genie back in the bottle."
The latest accounts from December's meeting of the ECB's Governing Council, released January 11, took investors by surprise as there was a clear hint that the central bank could recalibrate its message to markets in "early 2018" – nothing Mario Draghi had mentioned in the December press conference.
The understanding now is that the ECB should gradually shift its stance to avoid a more disruptive move later and should look at a broader revision of its policy guidance to reduce the focus on bond purchases and raise the emphasis on interest rates.
"While many observers have taken the latest account as proof that the more hawkish views are now dominating, also coming against the backdrop of more hawkish comments, it remains unclear whether this would also imply a more aggressive view on policy normalization," said Anatoli Annenkov, an ECB watcher at Societe Generale.
"We expect the redrafting of APP (the asset purchase program) forward guidance, softening the link between developments in inflation and asset purchases, to take place at the March meeting."