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We were again disappointed. Last week, investors did not hear what they were hoping for from Mario Draghi, the ECB chief, that is, when, how and at what rate the central bank will gradually put an end to its policy of quantitative easing. “Come back in October, and then you will find out”, was Draghi´s message to a gathering of reporters and to millions of investors and traders around the world who were glued to their screens.

 

Although in this case the old maxim “better late than never” would apply, the outlook regarding tapering QE by the ECB does not mean that monetary policy in the Eurozone will be normalized anytime soon. Even if the ECB begins dismantling QE at the beginning of next year and even if the central bank completely puts an end to the program in the course of 2018, monetary policy will still remain very loose for the coming years.

Why is this the case? Draghi, in this sense, was very clear: the ECB will raise the official rate only after a very long while after the central bank has officially ended QE. If we take a look at the Fed and how long it took the Fed to raise interest rates for the first time after putting an end to QE, then that experience would imply an interim period of about one and a half years.

Since the ECB has only one policy target, that is, keeping inflation below but close to two percent and keeping it there in the mid to long term (read: about two years into the future), the inflation forecasts for the coming years give us a chance to estimate whether the central bank based in Frankfurt will turn its interest rate wheel anytime soon.

“Gradual” Is the Key

Kim Jung-Un

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