European Central Bank President Christine Lagarde made statements during a joint press conference in Lisbon, Portugal.
Horacio Villalobos | Getty Images
FRANKFURT – Market participants are watching the European Central Bank with enthusiasm this week as the Frankfurt institution meets to discuss its pandemic-era stimulus amid inflation and strong economic growth.
Some inside and outside the bank believe it is time for the ECB to reduce its monetary stimulus, as global supply chain problems drive up prices for all kinds of goods. But there is still uncertainty about the coronavirus pandemic.
“While the ECB can moderate the pace of its emergency asset purchases modestly at [the fourth quarter], we do not expect the bank to announce when and how it will phase out its large “Pandemic Emergency Purchase Program” (PEPP) and if and to what extent it will strengthen its modest standard asset purchase program (APP) and it will make it more flexible, “Holger Schmieding, chief economist at Berenberg Bank, said in a research note.
“These key decisions, which promise to be highly controversial, are likely to be postponed to the December meeting,” he added.
The Christine Lagarde-led institution developed a new coronavirus asset purchase program in March 2020 to support the eurozone. The PEPP will end in March 2022 with a potential total envelope of € 1.85 trillion ($ 2.19 trillion).
The ECB currently buys 80 billion euros worth of bonds each month under the program, which is likely to fall to 70 billion euros by the end of Thursday’s Governing Council meeting, Schmieding added.
The ECB has also maintained its asset purchase program, known as APP, amid the pandemic that has a current monthly rate of € 20 billion. The central bank has used this program in combination with PEPP to maintain the 19-member economy.
10 years maximum
Inflation in the euro area peaked at a three-year high of 3% in August, while gross domestic product in the second quarter surprised on the rise with a 2% quarter-on-quarter increase. These developments may push the ECB to also update its growth projections, as Vice President Luis de Guindos recently hinted.
But even so, there are still doubts in the market.
“Looking to the future, it is unclear to what extent the ECB may become more positive amid persistent concerns about the Delta variant, the Chinese slowdown, the Fed’s downturn or the bottlenecks of the supply, ”said Frederik Ducrozet, an ECB observer with Pictet Wealth Management research note.
It is worth noting the difference of opinion of the Governing Council of the ECB. While some like the Bundesbank’s Jens Weidmann openly warn of high inflation, others like France’s François Villeroy de Galhau point to an improvement in funding conditions.
But there is not much noise from the ECB’s pigeons (those that support more monetary stimulus), which makes it likely that a reduction in the PEPP’s execution rate will not be too controversial.
The biggest test could be to create harmony within the ranks of the ECB in the APP. Decisions need to be made on the size and flexibility of the APP next year, when the PEPP ends.
“We have long reiterated our view that there will be no advantage in policy support beyond the end of the PEPP, with the likelihood that the ECB will announce a larger APP with some elements of flexibility. “Paul Hollingsworth, chief European economist at BNP Paribas, said in a research note.
For now, the ECB will avoid major moves, but instead will wait for more data and more evidence to arrive that the eurozone is really out of the pandemic situation.
—Silvia Amaro of CNBC contributed to this article.