ECB takes first small step in withdrawing stimulus 


The European Central Bank (ECB) announced its decision on Thursday (Sep. 9) to lightly reduce its emergency bond purchases over the coming quarter, as policymakers worry higher inflation may last long.

The Governing Council decided to buy bonds under its 1.85 trillion euro Pandemic Emergency Purchase Programme (PEPP) at a pace moderately lower than the 80 billion euros a month it bought over the past two quarters.

“Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the (PEPP) than in the previous two quarters,” the Frankfurt-based institution said in a statement.

The ECB started the PEPP in March 2020  to support the euro zone economy through the Covid-19 crisis, keeping borrowing costs low for governments and businesses.
The bank initially allocated €750 billion for PEPP asset purchases. This was increased by another €600 billion in June 2020 and again by €500 billion in December 2020, for a new total of €1.85 trillion. Officials on Thursday reiterated a pledge to keep the €1.85 trillion-euro running until March 2022 or later if needed.

Officials also took the following decisions: Keeping the interest rate on the main refinancing operations, marginal lending facility and the deposit facility at 0.00%, 0.25% and -0.50% respectively. The bank expects interest rates will remain at their present or lower levels until inflation is seen as stabilizing at 2% over the medium term.

ECB interest rate
(Source: ECB)

An  asset-purchase program continues at €20 billion a month and is expected to end “shortly before” the bank starts raising interest rates. Asset purchases will run until at least the end of March 2022.

ECB President Christine Lagarde during a press conference said that the recovery of the euro area economy is “increasingly advanced.” GDP across the 19-nation bloc climbed 2% in the second quarter, exceeding economist expectations. She also said that annual real GDP growth is projected at 5% this year, 4.6% next year and 2.1% in 2023. ” She added that recovery also depends on favorable
The inflation outlook “has been revised slightly upwards” but is expected to remain well below 2% in the medium term.

Inflation notched a 10-year high of 3% in August  from 2.2% in the previous month and well above market expectations of 2.7%. Core inflation more than doubled to 1.6%.
Lagarde said inflation is seen at 2.2% in 2021, 1.7% in 2022 and 1.5% in 2023, revised up from June.

ECB policymakers have recently sounded contrasting tones as to the danger of inflation becoming persistent rather than “transitory,” with some of them warning that maintaining an ultra-accommodative stance for too long also carries risks.

Lagarde said risks to the economic outlook remain “broadly balanced” and economic activity “could outperform our expectations if consumers become more confident and save less than currently expected.” According to her, recovery also depends on favorable financing conditions for all sectors of the economy and assured that “policy support remains essential to prevent balance sheet strains and tightening financing conditions from reinforcing each other.”

She also stated the Governing Council did not discuss “what comes next” but assured that the interest rate hike remains “pretty far.”

The ECB’s decision to stop the front-loading of its asset purchases and to reduce the monthly amount without announcing any explicit unwinding of the purchases is a “small victory” for the hawks, ING economist Carsten Brzeski said. “It is not tapering but a very tentative sign that tapering could eventually come,” Brzeski added.

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