Updates from the European Central Bank
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The European Central Bank will cut down its bond purchases for the rest of the year in response to improved economic and financial conditions, while saying it will increase its stimulus measures again if the outlook for the eurozone deteriorates.
After a two-day Governing Council meeting concluded on Thursday in Frankfurt, the ECB said it had decided to move to a “moderately slower pace” in its €1.85 trillion Pandemic Emergency Purchase Program (PEPP) from the €80 billion per year. monthly level at which it has been since March.
“Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council considers that favorable financing conditions can be maintained with a moderately slower pace of net asset purchases under the PEPP than in the previous two quarters” , the ECB said in a press release. press release.
Italian 10-year bonds rose slightly in price, pushing yields down 0.04 percentage point to 0.716%. The PEPP has been a boon to the bonds of more indebted euro area countries, which sold off sharply in markets during the height of the coronavirus crisis last year. Bond yields fall when prices rise.
The decision to delay the PEPP, the ECB’s main policy response to the pandemic, follows a strong recovery in growth and inflation in the eurozone as increasing coronavirus vaccinations have helped end lockdowns and boost of business and household activities.
ECB President Christine Lagarde is expected to present the move differently from the winding down being done by other central banks around the world, as she has no plans to end its bond purchases yet and is just adjusting the pace.
By contrast, the US Federal Reserve and the Bank of England have said they plan to phase out their asset purchases this year. Central banks in Canada, New Zealand and Australia have already done so.
Still, economists said the ECB’s shift ran counter to its new strategic commitment to maintain “strong and sustained” monetary support until inflation hits its medium-term target of 2 percent. The ECB predicts that this will not happen in the coming years, despite inflation reaching a 10-year high of 3 percent in August.
“The market is interpreting the ECB as a bit of a dovish high amid the global move towards less monetary policy support,” said Paul Diggle, deputy chief economist at Aberdeen Standard Investments. “I think they want to be seen that way. But a PEPP reduction is somewhat at odds with that.”
Seema Shah, chief strategist at Principal Global Investors, said: “It’s the first step towards winding down and investors will be listening closely for clues about the eventual winding down of PEPP.”
The ECB still has €500 billion to spend under the PEPP and said the scheme would continue until at least March 2022, or until the council decided that “the phase of the coronavirus crisis is over”. Even at a reduced pace from $60 billion to $70 billion a month, analysts say the PEPP still has enough firepower to absorb all new government-issued debt for the remainder of the year.
Council members left the door open to future increases in the pace of the bank’s bond purchases, saying it would “buy flexibly in accordance with market conditions and with a view to avoiding a tightening of the bond”. financing conditions that are inconsistent with countering the downward impact of the pandemic on the projected path of inflation”.
The ECB will continue to buy bonds even after the PEPP expires and most other central banks halt their buying programs altogether. The traditional asset purchase program still runs at €20 billion per month and is likely to be expanded and made more flexible when the PEPP expires. A decision on this is not expected until December.
The central bank will also release updated forecasts later on Thursday. Most analysts expect it to raise its inflation forecasts this year and in the coming years, although price growth is expected to slow next year and remain below the ECB’s target in 2023.
Additional reporting by Adam Samson in London