ECB dials back pandemic stimulus as inflation looms
ECB dials back pandemic stimulus as inflation looms

FRANKFURT: The European Central Bank (ECB) said on Thursday it will end its €1.85 trillion ($2.1 trillion) pandemic-era bond purchasing programme (PEPP) in March but ramp up a pre-crisis asset buying scheme to soften the transition and bolster the Eurozone economy.

The ECB will wind down the pace of PEPP purchases in the first quarter of 2022 and “will discontinue net asset purchases under the PEPP at the end of March 2022”, it said in a statement.

The pandemic emergency bond-buying programme, currently hovering up around €70 billion worth of assets every month, is the ECB’s main crisis-fighting tool, aimed at keeping borrowing costs low to stoke economic growth.

To avoid an abrupt drop in its bond buying in March, the ECB raised the pace of purchases under its pre-pandemic asset purchase programme.

This would be increased in the second quarter from April 2022 to €40 billion, and reduced to €30 billion in the third quarter, the ECB said in a statement.

The ECB underlined the importance of “flexibility” in its monetary response and said that PEPP purchases could be resumed “to counter negative shocks related to the pandemic.”

The bank also left its interest rates at historic lows, including a negative deposit rate that means lenders pay to park excess cash at the central bank.

The Bank of England earlier surprised markets with an unexpected rate hike to tame soaring inflation.

While the ECB has up to now described the spike as “transitory”, attributing it to one-off pandemic related factors, inflation in the 19-nation euro region has progressed at a rate that has exceeded observers’ expectations.

In November, prices rose 4.9 per cent on a year-on-year basis in the eurozone, a record in the history of the single currency.

The emergence of the more contagious Omicron variant has raised fears of more pandemic-related disruption, aggravating supply bottlenecks that have pushed prices up faster and hampered economic growth.

ECB President Christine Lagarde will share the bank’s latest economic forecasts in her press conference at 13:30 GMT, including the first predictions for 2024.

Last updated in September, the bank expected the economy to grow by five per cent in 2021, 4.6 per cent in 2022 and 2.1 per cent in 2023.

On the inflation side, price rises were expected to be 2.2 per cent in 2021 for the whole year, before dropping under the ECB’s two per cent target for the next two years at 1.7 per cent and 1.5 per cent.

Recent pressure on prices could lead to “the largest ever upward revision to inflation in 2022, from 1.7 to 2.7 per cent”, according to Frederik Ducrozet, strategist at Pictet Wealth Management.

The focus will be on the new number for 2024, said Andrew Kenningham of Capital Economics, “the nearer this is to two per cent, the closer the bank will be to raising rates”.

But a lower figure would allow Lagarde to continue to argue that the spike was a passing phenomenon, paving the way for a more gradual easing of economic support.

Across the Atlantic, where the rise in inflation has been even steeper, the US Federal Reserve announced that it was doubling the pace of its withdrawal from asset purchases, bringing the end forward by several months.

Fed officials dropped talk of “transitory” inflation as figures for November showed a 6.8 per cent year-on-year rise.

Policymakers at the central bank also indicated that they expected the Fed could raise its interest rates up to three times in 2022.

The possibility of the ECB following suit still seemed distant, even as inflation climbs.

Lagarde has previously said it was “very unlikely” the ECB would raise its rates in 2022 with the bank planning to end its asset purchase programme fully before moving on to rate hikes.

But despite today’s announcement of a more accommodative monetary response, the bank has left itself some flexibility to respond to changing economic conditions, which “should also leave the ECB with the possibility of earlier, and larger hikes”, said Antoine Bouvet, a strategist at ING.

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