The President of the European Central Bank, Christine Lagarde, during the live broadcast of a press conference following the meeting of the Governing Council of the ECB.
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LONDON – The European Central Bank will announce a reduction in its Covid-related stimulus in December, four analysts told CNBC amid an economic improvement in the eurozone.
In the United States, the Federal Reserve has already indicated that it is likely to start shrinking before the end of the year. President Jerome Powell said last week that the U.S. economy is at a point where it does not need as much political support as it had after the pandemic, although the pace of reduction of asset purchase. .
And in the eurozone, a similar announcement could be just around the corner.
“My guess is that they will probably do it in December,” Gilles Moëc, chief economist at AXA Investment Managers group, told CNBC on Wednesday.
The ECB meets on September 9, but analysts think the central bank will wait a few more months before announcing what it will do about its Covid-related measures.
“I think they want to take some time and have new forecasts,” Moëc said, before the ECB’s governing council makes a decision.
In addition to having new forecasts on the table, Chiara Zangarelli, European economist at Nomura, said the ECB will also want to see what happens to the pandemic in the coming months.
But as things stand, he said, “it would be difficult even for the impoverished” ECB members to postpone an announcement on reducing their volume beyond December.
ECB chief economist Philip Lane also said in an interview last week that “September is a long way off” from the current completion date of its Covid-related asset purchase program, suggesting that a announcement about volume reduction could take a few more months.
Market participants monitor key data releases to understand how the ECB might react.
Regardless of when PEPP might end, this is not the end of the ECB’s role in terms of QE.
Preliminary data released on Tuesday suggested that the eurozone experienced its highest inflation rate in a decade in August, with a 3% decline due to high vaccination rates and a decline in coveted restrictions. in the region.
The ECB had said it expected a rise in consumer prices this year, albeit due to temporary factors. The central bank’s goal is to achieve a general inflation rate of 2% in the medium term. If higher inflation rates persisted, this would add pressure to the ECB to reverse its stimulus at a faster pace.
As it might seem
The Christine Lagarde-led institution developed a new coronavirus asset purchase program in March 2020 to support the eurozone. The Pandemic Emergency Purchase Program (known as PEPP) will end in March 2022 with a potential total envelope of 1.85 trillion euros ($ 2.19 trillion).
The program has given the ECB more flexibility, specifically in being able to acquire Greek bonds, which did not meet the investment criteria that would have to be bought in other programs.
“If PEPP purchases can fall significantly, I think it’s a little premature, I think we’ll have an indication that PEPP purchases will continue to be very high during the fourth quarter before falling in the first quarter,” Guillaume said. Menuet, European economist of Citi. Wednesday on CNBC’s “Street Signs Europe.”
Moëc, of AXA’s investment managers, expects the PEPP to conclude in March, “but the big conversation will be what to do with the APP.”
When the pandemic hit the euro area in March 2020, the ECB also maintained its asset purchase program, known as APP, which has a current monthly rate of 20 billion euros. The central bank has used this program in combination with PEPP to maintain the 19-member economy.
Berenberg economist Salomon Fiedler told CNBC on Wednesday that the APP would likely last until 2023 and that a potential first-order rise could occur in the fourth quarter of this year.
But in the meantime, Nomura’s Zangarelli said the APP is likely to expand in size once the PEPP is over. He hopes that these details will also be made known at the December meeting.
ECB Lane also said last week that “there are no conditions to end the APP.”
“Regardless of when PEPP may end, this is not the end of the ECB’s role in terms of QE. That’s why we don’t need a huge amount of preparation time to think about it. Of course, we can’t leave it too late either. But six months it is a long time. In the autumn, we will have to solve many problems related to what should be in 2022, “he told Reuters.
What could derail a December ad?
“Covid, Covid, Covid,” said Moëc, of AXA’s investment managers.
He said the economic situation in the euro area benefits from high vaccination rates and general caution to avoid lifting all Covid restrictions. But even if the pandemic deteriorates in the coming months, he said “the bar to keep the PEPP as it is today is very high.”
Across the European Union, 70% of the adult population has been completely vaccinated against coronavirus.