FRANKFURT — Market participants are keenly watching the European Central Bank this week as the Frankfurt institution meets to discuss its pandemic-era stimulus amid soaring inflation and solid economic growth.
Some inside and outside the bank believe it’s high time that the ECB reduces its monetary stimulus as global supply chain problems push prices higher for all sorts of goods. But uncertainty over the coronavirus pandemic still remains.
“Whereas the ECB may moderate the pace of its emergency asset purchases modestly in [the fourth quarter], we do not expect the bank to announce when and how it will phase out its big ‘Pandemic Emergency Purchase Programme’ (PEPP) and whether and to what extent it will beef up its modest standard Asset Purchase Programme (APP) and make it more flexible,” Holger Schmieding, a chief economist with Berenberg Bank, said in a research note.
“These key decisions, which promise to be highly controversial, will likely be postponed to the December meeting,” he added.
The institution led by Christine Lagarde developed a new asset purchase program in the wake of the coronavirus in March 2020 to support the euro zone. The PEPP is due to end in March 2022 with a potential total envelope of 1.85 trillion euros ($2.19 trillion).
Currently the ECB buys 80 billion euros worth of bonds every month under the program, which will likely be reduced to 70 billion euros at the completion of its Governing Council meeting on Thursday, Schmieding added.
The ECB has also kept its asset purchase program, known as APP, amid the pandemic which has a current monthly pace of 20 billion euros. The central bank has been using this program in combination with PEPP to sustain the 19-member economy.
Inflation in the euro zone hit a 10-year high of 3% in August, while gross domestic product in the second quarter surprised to the upside with a 2% gain quarter-on-quarter. These developments may push the ECB to also upgrade its growth projections as Vice President Luis de Guindos recently hinted at.
But yet there are still doubts in the market.
“On a forward looking basis it’s unclear how much more positive the ECB can turn amid lingering concerns over the Delta variant, the Chinese slowdown, Fed tapering or supply side bottlenecks,” said Frederik Ducrozet, an ECB watcher with Pictet Wealth Management, in a research note.
It’s worth noting the difference in opinion within the ECB’s Governing Council. While some like the Bundesbank’s Jens Weidmann openly warn of high inflation, others like France’s François Villeroy de Galhau stress an improvement in financing conditions.
But there’s not much noise from the ECB’s doves — those that support more monetary stimulus — which makes it likely that a reduction in the run rate of the PEPP won’t prove to be too controversial.
The biggest test could be creating harmony within the ECB’s ranks on the APP. There needs to be decisions made on the size and flexibility of the APP by next year, when the PEPP comes to an end.
“We reiterate our long time view that there will be no cliff-edge in policy support beyond the end of the PEPP, with the ECB likely to announce an APP which is both larger in size and carries over some elements of flexibility,” said Paul Hollingsworth, chief European economist with BNP Paribas, in a research note.
For now the ECB will avoid any big movements but will instead wait for more data coming in, and for more evidence that the euro zone is really out of the pandemic doldrums.
