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Hello, and welcome to Charts That Matter. It looks very much as though Europe is giving us a new taper tantrum. Now, you might remember five years ago it only took a mere mention of the possibility that the Fed would start to taper off its QE bond purchases, which were keeping bond yields down, by Ben Bernanke, who was running the Fed at the time, and bond bond yields shot up.
This week, we've seen two ECB officials suggest that it's about time they might start cutting back on their QE bond purchases. And again, bond yields have shot up. Now, let's take a look at the context for this. This shows you the size of the ECB's balance sheet - how much stuff they've bought, that they're holding on their balance sheet, in trillions of euros. And you can see they have form for trying to stop stimulating before they're really ready to do.
You can see that actually back there just before Lehman Brothers went down, they actually raised rates, which is a terrible mistake we subsequently learned. Then after the immediate Lehman crisis, they tried to stop stimulating for a while. That didn't work out, as you saw, the eurozone sovereign debt crisis. So they had to start stimulating once again. Come 2013, again, you can see them trying to move away from that. And again, as Europe lapses into a deflationary scare, they have no choice but to start on the current big programme of QE bond purchases.
Will they make the same mistake again and tighten too early? Now, there are many people who think that they could. Firstly, it does look as though the eurozone economy has slowed down recently, which is very disappointing. But perhaps more importantly, there is the issue of inflation, which is what QE is supposed to be all about - bringing inflation up. This line here shows you core inflation for the eurozone.
You can see that it got above 2 and 1/2% before the crisis. But since the crisis, it's stayed very reliably within the 2% target. Since we've seen the big, new campaign of QE, again, you can see that the rate has largely stayed at about the level where it's at now.
It is not clear at all to many people that inflation is catching on, and that there is a need to taper off QE just yet. That means, I think, that we can guarantee that the whole question of whether the ECB should be tapering is going to dominate conversation from now on.
