Europe | Monetary Policy & Inflation
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Summary
- The ECB is expected to announce a reduced PEPP purchase pace at its meeting on Thursday, most likely back to €50-60bn per month at the start of the year.
- APP purchases will likely step up in the future, but we expect no decision before year end.
- Updated staff forecasts on GDP growth and inflation are unlikely to change significantly from the June forecast round, with the overall tone set to remain dovish.
Thursday’s ECB Governing Council meeting could be the first step towards reining in some of the pandemic stimulus. The ECB is expected to announce a reduced pace of PEPP purchases for Q4, dropping the reference to a ‘significantly higher pace’ compared with Q1, while leaving unchanged the current end date of March 2022 and €1,850bn size. Any announcement on the future of the €20bn/month APP is unlikely before early next year, although it will undoubtedly step up once PEPP expires. We expect the overall tone of Thursday’s meeting will remain very dovish.
Changes to Staff Projections Likely to Be Small
Updated staff projections this month are unlikely to materially change the ECB’s policy stance. President Christine Lagarde said at the July meeting that the new ‘well ahead’ wording in the forward guidance on rates meant inflation would need to reach target around the midpoint of the forecast horizon – and be expected to stay there. With headline CPI at 3% YoY in August, the 2021 inflation forecasts will undoubtedly be revised higher. But the ECB seems certain to maintain its stance that the current acceleration in prices is transitory. The below-target inflation forecasts of 1.5% and 1.4% for 2022 and 2023 may therefore change little. And with core inflation still subdued, the ECB will reiterate its patient approach under its new 2% symmetric inflation target.
Forecasts for GDP growth may also change little. The 2.2% QoQ reading for Q2 GDP was much higher than the ECB’s forecast of 1.4%. But, as per Executive Board Member Philip Lane’s 25 August interview with Reuters, ‘there’s probably some counterbalance to that good second quarter’. Namely, these are ongoing supply bottlenecks, risks from the Delta variant and slower growth in China.
PEPP Pace to Slow, APP Unchanged for Now
Little was said at the last meeting on PEPP and APP, with the new forward guidance linked only to interest rates. But with new inflation forecasts on Thursday, the ECB must announce whether the ‘significantly higher pace’ of PEPP purchases to around €80bn per month, versus €50-60bn at the start of the year, will continue through Q4. Euro area bond yields have risen over the past month but remain some way below the Q2 highs, leaving looser financing conditions overall. The euro has also weakened over the period, easing broad monetary conditions. The ECB will likely drop the language on the ‘significantly higher pace’ from the statement. And while it will not likely give an explicit monthly amount, we expect purchases will return to the €50-60bn seen at the start of this year.
Lagarde stressed during the July press conference that rather than lower for longer, the new forward guidance should be seen as a way to avoid premature tightening. As this will be relevant for all policy tools, it will ultimately mean APP purchases step up once PEPP expires and the APP takes over as the main tool to manage financing conditions. But any discussion on that is unlikely this week. Lagarde will nevertheless make the point that even by slowing the pace of PEPP, the ECB is still set to purchase significant amounts of bonds – and that PEPP reinvestment will continue until at least end 2023.