The European Central Bank meets as Covid closures complicate recovery

FRANKFURT – With an almost unknown policy change this week, observers at the European Central Bank will have to closely monitor more detailed details about its pandemic stimulus program as policymakers wait for more data before taking decisive action.

Recent economic figures point to a stronger-than-expected economic recovery, and more coronavirus blockages across the eurozone are unlikely to justify greater central bank action.

“The political stance is unlikely to change,” Mark Wall, chief economist at Deutsche Bank, said in a research note.

“The decision on whether or not to maintain the new faster pace of PEPP purchases will be made after a joint assessment of funding conditions and inflation prospects at the June 10 Council meeting,” he added, suggesting there will be no updates for Thursday’s meeting this week.

As a result of the pandemic, the ECB launched its Pandemic Emergency Purchase Program (PEPP), which buys bonds in the region to stimulate lending and fuel an economic recovery. It left this program unchanged at the March meeting, with a target purchase amount still of 1.85 trillion euros ($ 2.21 trillion), which should last until March 2022.

However, it decided to accelerate monthly bond purchases to alleviate some of the upward pressure on sovereign debt yields in the region, which had meant more expensive refinancing for euro area countries or a tightening of financial conditions.

“PEPP purchases were € 74 billion in March,” Wall explained. “This was significantly higher than the € 53 billion and € 60 billion of February and January.”

But looking at the minutes of the ECB Governing Council meeting in March, it is clear that opposition to rising yields was not as complete as it first appeared.

“The decision to speed up the procurement rate would significantly demonstrate that the Governing Council was willing to use the flexibility of the program, without changing the overall staffing or duration of the program,” the March meeting accounts said. The tone of the accounts could best be described as a balance between the ECB’s pigeons and hawks.

There are growing indications that the economy will recover strongly during the second half of this year.

The improved outlook has caused some policymakers to stop making themselves and insinuate a way out of the PEPP.

Pierre Wunsch and Klaas Knot, the heads of the Belgian and Dutch central banks, respectively, have started the discussion on a possible exit from the PEPP and the latter suggests that it could reach the third quarter of this year.

“If the economy develops according to our baseline, we will see better inflation and growth starting in the second half,” Knot said earlier this month. “In this case, it would be equally clear to me that from the third quarter onwards we can begin to phase out pandemic emergency purchases and end them as planned in March 2022.”

It looks like the start of a discussion that is likely to gain strength over the summer.

“We doubt markets will have a price, but we agree that PEPP’s exit will be the key issue for the ECB over the summer, as the pace of economic recovery is expected to increase rapidly in the second half, while that inflation rises, “Anatoly Annenkov, an ECB observer for Societe Generale, said in a research note.

“It will be difficult to materially reduce the PEPP before the (Federal Reserve) which we currently expect to start shrinking in early 2022,” he added.