The European Central Bank is expected to start the delicate process of shrinking its balance sheet this week after eight years of bond purchases and generous lending more than quadrupled its total assets to €8.8tn.
The shift would mark an intensification of the ECB’s efforts to remove monetary stimulus and cool inflation, which in September reached an all-time high of 9.9 per cent in the 19 countries that share Europe’s single currency, almost five times its 2 per cent target.
Policymakers must proceed with caution or risk a UK-style bond market sell-off that would add to the economic problems facing the region. “It is going to be a challenging six months for the ECB, in which many of the potential trade-offs between inflation, growth and financial stability could become more intense and tricky to manage,” said Silvia Ardagna, senior European economist at Barclays.