The European Central Bank should be clearer in communicating its future monetary normalisation strategy after this Thursday’s meeting. This is compatible with maintaining very accommodative monetary conditions in the short term, and also with anticipating that those conditions will remain very favourable in the medium term. The challenge lies in how to strike a balance between transparent communication, which improves certainty about the future, and the essential flexibility and room for manoeuvre required in times as uncertain as the present.
While the euro area is debating what monetary normalisation will look like, in the United States it is already taking shape. Even so, the approach has not been so different so far between the two central banks. The US Federal Reserve has begun raising official interest rates after ending its policy of purchasing money in the market. In October, it began reducing its balance sheet. Meanwhile, the ECB still has to decide when QE (Quantitative Easing) will end, making the start of rate hikes conditional on that moment. The European monetary authority continues to prioritise short-term financial stability and to warn about the low level of inflation. In the United States, there are already warnings about the future risk to financial stability stemming from overly accommodative financial conditions, while the current low level of inflation is considered temporary.
We could speak of different moments within the same trend. Let us not confuse this with a decoupling. What does seem reasonable is to expect the ECB to be far more cautious and concerned than the Fed about the potential negative consequences of future monetary normalisation. Remember the interest rate increase in 2011, which was more inappropriate than premature. A mistake in the normalisation process now would also entail an enormous cost in credibility and even effectiveness if it had to be reversed later. The normalisation of monetary policy in Europe will necessarily be more gradual and even difficult to anticipate. Too many variables will influence it, including technical ones, given the narrow range of assets that are currently eligible for purchase under QE.
