World Economy

ECB Worries About Repeat of Fed’s ‘Taper Tantrum’

The European Central BankThe European Central Bank

The European Central Bank is focused on avoiding a policy error committed four years ago by its big brother, the Federal Reserve. When the Fed indicated—on May 21, 2013—that it would gradually wind down its $85 billion-a-month bond-buying program, asset prices and currencies plunged around the world in an episode known as the taper tantrum.

Now, as the economy on this side of the Atlantic finally starts to recover, investors are watching closely for signs of a similar policy turn from the ECB, Dow Jones reported.

The bank’s top officials have acknowledged the improved economic outlook. But they have yet to make any change at all to their aggressive monetary stimulus, which includes €60 billion ($67 billion), a month of bond purchases and subzero interest rates.

That is partly the Fed’s fault: ECB officials worry that even a small change in communications could ricochet through financial markets, undoing their extensive efforts to support growth and inflation.

“You all remember the ‘taper tantrum’ in the US, and I think the central banks prove to be good learners,” Bostjan Jazbec, who sits on the ECB’s 25-member rate-setting committee, told The Wall Street Journal on Wednesday.

The minutes of the ECB’s latest policy meeting, published on Thursday, underlined similar concerns. Officials worried that a minor change in language could cause investors to quickly price in a completely new policy path, toward higher interest rates.

“Even small and incremental changes in communication could have strong signaling effects when interpreted as heralding a change in the monetary policy stance,” the minutes said.

“What transpires very strongly from the minutes is the determination to be extremely cautious in modifying communication,” said Peter Vanden Houte, an economist with ING in Brussels.

The ECB has a history of raising interest rates too early in the economic cycle. In both 2008 and 2011, the central bank raised rates just before the economy sank into recession.

But leaving its easy-money policies in place is risky, too. The eurozone economy outpaced the US in the first quarter, and inflation has risen to 1.9%, within the ECB’s target range. And yet the central bank is still signaling it might increase, rather than reduce, its stimulus.

If the ECB is seen to be responding too slowly to the changed outlook, the bank could lose credibility with investors. That would make it harder to control inflation.

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