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It’s been nearly seven years but investors are finally beginning to hone in on the prospect of a tightening in monetary policy in the eurozone.

A subtle shift in the signalling from European Central Bank president Mario Draghi yesterday has pushed up the probability of a December 2017 rate rise to over 50 per cent from just 10 per cent at the start of the month.

Despite not changing much of its formal language about being ready to provide more monetary medicine to the eurozone, Mr Draghi declared victory over the deflation risks that had prompted the ECB into its trillion euro bond-buying programme two years ago this week.

“There is no longer that sense of urgency in taking further actions while maintaining the accommodative monetary policy stance including the forward guidance”, Mr Draghi told journalists at his March press conference yesterday.

Analysts judged the remarks to be the start of a gradual shift in the ECB’s forward guidance on interest rate rises, with Mr Draghi stressing the downward risks to growth and inflation were beginning to dissipate.

This shift in tone has helped drag Germany’s 10-year bond yields 5 basis points higher to 0.42 per cent from just 0.18 per cent 10 days ago. (Yields rise when prices fall.) The euro is also holding on its gains this morning, strengthening 0.2 per cent against the dollar.

“The message was clear that the risk of deflation has largely disappeared whilst expectations for growth and continued improvements in employment conditions are at the forefront of the ECB’s forward guidance”, said Lyn Graham-Taylor at Rabobank

The ECB last raised interest rates in early 2011, a move that has since been seen as choking off the bloc’s recovery at the height of its sovereign debt crisis. Although playing down the prospects of a rate hike before the end of its QE programme, Mr Draghi added the “probability of a rate cut has gone down”.

Markets have followed cue, pricing in a near 100 per cent probability of higher interest rates by the end of 2018, up from just 54 per cent at the start of month.

Economists at BNP Paribas are now sticking with their call that policymakers will lift the eurozone deposit rate from a record low of -0.4 by 10 basis points as early as September this year and start winding down its bond buying by early 2018.

(Top chart: Bloomberg.)

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