Once the European Central Bank starts tightening its purse strings, there is a risk that interest rates will soar in high-debt economies. The warning comes directly from the Eurotower: “A gradual normalization of bond yields in the euro area in tandem with the improvement of economic growth prospects – states the ECB's Financial Stability Review – would be beneficial from the point of view of financial stability. However, there are risks that yields could rise sharply without a simultaneous improvement in growth prospects.
At the next meeting of the Governing Council, Eurotower leaders will discuss how to communicate in the future the monetary tightening (or rather, the interruption of the stimulus measures), which will probably take place in 2018.
Chief economist Peter Praet stressed the need not to rush the process, precisely to avoid violent market reactions. Benoit Coeuré, head of the markets, however, argued that gradualism itself carries risks.
