It has been nearly seven years but investors are finally beginning to focus on the prospect of a tightening in monetary policy for the eurozone.
A subtle shift in the signalling from European Central Bank president Mario Draghi this week has pushed up the probability of a December 2017 rate rise to more than 50 per cent from just odds of a tenth at the start of the month.
Despite not changing much of its formal language about being ready to provide more monetary medicine to the eurozone, Mr Draghi declared victory over the deflation risks that had prompted the ECB to begin its trillion euro bond-buying programme two years ago this week.
“There is no longer that sense of urgency in taking further actions while maintaining the accommodative monetary policy stance including the forward guidance,” Mr Draghi told journalists at his March press conference.
Analysts judged the remarks to be the start of a gradual shift in the ECB’s forward guidance on interest rate rises, with Mr Draghi stressing the downward risks to growth and inflation were beginning to dissipate.
“The message was clear that the risk of deflation has largely disappeared whilst expectations for growth and continued improvements in employment conditions are at the forefront of the ECB’s forward guidance”, said Lyn Graham-Taylor at Rabobank.
The ECB last raised interest rates in early 2011, a move that has since been seen as choking off the bloc’s recovery at the height of its sovereign debt crisis. Although playing down the prospects of a rate increase before the end of its quantitative easing programme, Mr Draghi added the “probability of a rate cut has gone down”.
Economists at BNP Paribas are now remaining with their call that policymakers will raise the eurozone deposit rate from a record low of -0.4 by 10 basis points as early as September this year and start winding down its bond buying by early 2018.