Europe | Monetary Policy & Inflation
ECB Preview: Biding Time Until June
- By Caroline Grady
- 2 min read
Stepped up PEPP purchases since the 11 March ECB meeting leave little need for any policy changes at this week’s governing council meeting. President Christine Lagarde is likely to reiterate that the ECB will assess the pace of purchases in June and that, for now, the stance of monetary policy remains appropriate.
The Step Up in PEPP Has Been Moderate So Far
Despite the announcement of a ‘significant’ increase in PEPP purchases for Q2 at the 11 March ECB meeting, weekly data show a fairly limited increase. Average weekly purchases are now running at €16.9bn YTD versus €13.9bn before the March meeting. Expectations were around the €20bn mark, although the Easter holiday has probably played a role in the lower purchases. And Lagarde and other governing council members have cautioned against overanalysing the weekly data with the commitment to increase purchases to run throughout Q2. Total PEPP purchases stand at €960.3bn versus the €1,850bn envelope, currently through March 2022.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Summary
- Thursday’s ECB meeting is unlikely to see any policy shift. The Governing Council will likely reaffirm increased PEPP purchases through Q2 and reiterate the program’s flexibility.
- Lagarde will probably stress that the current move higher in inflation is temporary and the medium-term inflation trajectory remains below target.
- The 10 June governing council meeting remains the key date. The ECB will review the increased pace of PEPP purchases then and either maintain or ease back based on its updated view of the inflation outlook and financing conditions.
Stepped up PEPP purchases since the 11 March ECB meeting leave little need for any policy changes at this week’s governing council meeting. President Christine Lagarde is likely to reiterate that the ECB will assess the pace of purchases in June and that, for now, the stance of monetary policy remains appropriate.
The Step Up in PEPP Has Been Moderate So Far
Despite the announcement of a ‘significant’ increase in PEPP purchases for Q2 at the 11 March ECB meeting, weekly data show a fairly limited increase. Average weekly purchases are now running at €16.9bn YTD versus €13.9bn before the March meeting. Expectations were around the €20bn mark, although the Easter holiday has probably played a role in the lower purchases. And Lagarde and other governing council members have cautioned against overanalysing the weekly data with the commitment to increase purchases to run throughout Q2. Total PEPP purchases stand at €960.3bn versus the €1,850bn envelope, currently through March 2022.
But there has also been less need for the ECB to step in. GDP-weighted euro-area yields are largely unchanged versus the March meeting, and the euro is broadly unchanged compared with the appreciation earlier in the year. The earlier tightening in monetary conditions has therefore halted.
Vaccination rates in Europe are also increasing after a very sluggish start. Rising daily COVID cases have forced governments in Germany and France to introduce further restrictions, thereby increasing downside risks to the recovery. But stronger global momentum has buoyed PMIs across the region. The composite PMI is back in expansionary territory for the first time since October, driven by an all-time high in the manufacturing component. The services PMIs have also improved though remain in contractionary territory.
Overall, we expect little new information at Thursday’s press conference. Recent ECB blogs plus the minutes from the last meeting have made it clear that inflation and financing conditions remain the main determinants of the future pace of PEPP purchases after Q2. Lagarde will avoid being drawn into specifying exactly what a ‘significant’ increase means. And until then, policy settings will remain unchanged.
Caroline Grady is Head of Emerging Markets Research at Macro Hive. Formerly, she was a Senior EM Economist at Deutsche Bank and a Leader Writer at the Financial Times.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)