The European Central Bank is almost certain that it will maintain a generous stream of incentives at the policymakers’ meeting on Thursday as it fears that higher borrowing costs could stifle a nascent recovery.
Just emerging from a double-dip pandemic recession, the eurozone economies in 19 countries have relied on unprecedented ECB incentives to stay afloat. And even if growth accelerates with the relaxation of COVID-19 restrictions, policymakers seem interested in remaining on the side of caution.
Recent comments from ECB President Christine Lagarde and Board Member Fabio Panetta suggest that the June discussion effectively ended well before Thursday’s meeting and a cut in bond purchases is unlikely, even if policymakers see an improvement in growth prospects and do so quickly Recognize the speed of vaccinations.
Panetta flatly opposed a reduction in emergency bond purchases, while Lagarde said it was “far too early” to discuss a curtailment of the bank’s € 1.85 trillion Emergency Purchase Program (PEPP). Continue reading
Even if politics could take another route, they usually stand behind their presidents and rarely make changes to the proposals of the six-member Executive Board.
Weak medium-term inflation outlook is the main reason for maintaining strong support, but policy makers also fear that borrowing costs will rise, so an ECB withdrawal could trigger potentially dangerous market volatility.
“The longer the ECB waits before admitting that the reasons for keeping its emergency pandemic purchase program in full swing are no longer as strong as in March, the less smooth the transition to fewer bond purchases could be in the future,” said Berenberg That said the economist Holger Schmieding.
“If so, bond yields could pick up more after a while.”
Eurozone government bond yields traded near their lowest level since April on Thursday.
To make matters worse, the ECB could likely push most, if not all, of its growth and inflation forecasts upwards and even raise its growth forecast by declaring risks “balanced” to replace a long-running line on downside risks.
The rate of inflation is also rising and last month exceeded the ECB’s target of just under 2%, a mark that it has largely fallen below in the past ten years. Continue reading
But the economy will take another year just to grow back to pre-pandemic levels, and the jump in inflation is mainly a reversal of last year’s energy price slump, not the start of a new era of price pressures, policymakers said.
Underlying price pressures, a key focus of the ECB, remain anemic and wage growth is weak, suggesting inflation will be under-inflated for years.
Europe is also well behind the United States in its recovery, so any withdrawal of support from the Federal Reserve would be viewed as a dangerous signal.
US inflation data, due to be released at 1230 GMT, is expected to show prices up 4.7% last month from 4.2% in April, with a stronger reading likely to rekindle speculation about fewer Fed bond purchases.
In both Japan and China, wholesale prices rose at the fastest rate they had for over a decade due to rising raw material prices. Continue reading
“Given the nervousness of the markets over the throttling talks and the ECB’s determination to distance itself from preparations for the US throttling in the summer, the ECB is likely to signal unchanged purchases through September,” said Anatoly Annenkov, economist at the Societe Generale.
But the end of the emergency buying is coming and policymakers are unlikely to expand the program or extend it beyond its scheduled end in March 2022 amid the solid recovery in the economy, economists polled by Reuters said.
This will put pressure on policymakers to move beyond the emergency buying of bonds. Some signals for this could come as early as September, say economists.
As the medium-term inflation outlook remains subdued, declining PEPP purchases are likely to go hand in hand with an expansion of the ECB’s less flexible but open-ended asset purchase program, signaling that the ECB’s support, albeit less generous, will continue well into the Future.
The ECB will announce its monetary policy decision at 1145 GMT, followed by Lagarde’s press conference at 1230 GMT. With Thursday’s decision, the bank’s deposit rate, its benchmark, will stay at minus 0.5%.
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