Markets have reacted dramatically as central bankers meeting in Portugal warned policy tightening could be just around the corner for the world’s major economies.
The euro rose to a 12-month high against the dollar as ECB Central Bank president Mario Draghi appeared to hint the days of quantitative easing were numbered.
Bond markets also reacted to the bankers’ comments, with UK two-year gilts rising to their highest point in a year, and German 10-year yields seeing the biggest increase in two years.
The dollar fell sharply as Bank of England governor Mark Carney also hinted UK interest rates might rise, in sharp contrast to his Mansion House speech last week, sending sterling to a recent high of $1.29.
The governor of the Bank of Canada, Stephen S. Poloz, also suggested early interest rate rises could be on the cards.
Mr Draghi told the ECB Forum on Central Banking that “all the signs now point to a strengthening and broadening recovery in the euro area. Deflationary forces have been replaced by reflationary ones.”
Mr Draghi had to clarify his comments later by saying any tightening would only occur in tandem with continued economic growth – causing the euro to drop back slightly.
Meanwhile in his speech, Mr Carney commented that “some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen, and the policy decision accordingly becomes more conventional”.
Colin Dewar, currency dealing manager at Hargreaves Lansdown, said there had been “mixed messages” coming from the Bank of England.
“Mark Carney last week seemed to allude to the fact there wasn’t going to be a rate rise in the immediate future, then speaking at the conference seemed to indicate it might be sooner rather than later.”
Some experts believe markets have been overreacting to bankers’ comments.
In an interview with Bloomberg, BlackRock senior advisor Ewen Cameron Watt said the focus should be on the overall tone of comments made at the meeting – “less dovish, not more hawkish”.
“The tone of the central banks is all slightly different but financial conditions are beginning to be a lot more important in the dialogue, and there’s a subtle switch from inflation to growth in terms of the comments,” he said.
“What the central banks are saying is if we don’t reduce accommodation as economies continue to expand we’ll actually be loosening and we don’t want to do that because financial conditions are already quite loose and we are beginning to be a bit concerned about some of the implications."