With a policy change pretty much off the table this week, European Central Bank watchers will have to closely monitor finer details about its pandemic stimulus program as policymakers wait for more data before taking decisive action.
Recent economic figures do point to a stronger-than-expected economic recovery, and further coronavirus lockdowns across the euro zone won’t likely warrant further action by the central bank.
“A change in policy stance is unlikely,” said Mark Wall, a chief economist with Deutsche Bank, in a research note.
“A decision whether or not to maintain the new faster pace of PEPP purchases will be made after a joint assessment of financing conditions and the outlook for inflation at the Council Meeting on June 10,” he added, suggesting no updates for the meeting on Thursday this week.
PEPP sped up
In the wake of the pandemic, the ECB launched its Pandemic Emergency Purchase Program, or PEPP, which buys bonds in the region to stimulate lending and fuel an economic recovery. It left that program unchanged at its meeting in March, with the target purchase amount still at 1.85 trillion euros ($2.21 trillion) — which is due to last until March 2022.
However, it decided to accelerate the bond purchases on a monthly basis to alleviate some of the upward pressure of sovereign debt yields in the region — which had meant more expensive refinancing for euro zone countries or a tightening of financial conditions.
“PEPP purchases were 74 billion euro in March,” Wall explained. “This was significantly higher than the 53 billion euro and 60 billion euro in February and January.”
But looking at the minutes of the meeting by the ECB’s Governing Council in March, it’s clear the opposition to rising yields was not as comprehensive as it first appeared.
“The decision to accelerate the purchase pace significantly would show that the Governing Council was willing to use the flexibility of the programme, without changing the overall envelope or duration of the programme,” the accounts of the March meeting said. The tone of the accounts might be best described as a balancing act between the doves and the hawks at the ECB.
More and more signs are emerging that the economy will pick up strongly in the second half of this year.
The improved outlook has prompted some policymakers to step out already and hint at an exit to the PEPP.
Pierre Wunsch and Klaas Knot, the Belgian and Dutch central bank chiefs respectively, have started the discussion about a possible PEPP exit with the latter suggesting it could come as early as the third quarter of this year.
“If the economy develops according to our baseline, we will see better inflation and growth from the second half onwards,” Knot said earlier this month. “In that case, it would be equally clear to me that from the third quarter onwards we can begin to gradually phase out pandemic emergency purchases and end them as foreseen in March 2022.”
Lagarde says 2021 will probably see inflation at 1.5 percent
This seems like the start of a discussion that will likely gather steam during the course of summer.
“We doubt this is priced in by markets but agree that the PEPP exit will be the key topic for the ECB during the summer given that the pace of economic recovery is expected to pick up rapidly in the second half while inflation is expected to rise,” said Anatoli Annenkov, an ECB watcher with Societe Generale, in a research note.
“It will be difficult to materially taper the PEPP before the (Federal Reserve) which we currently expect to start tapering in early 2022,” he added.
