ECB Keeps Stimulus on Track as Inflation Unsettles Markets
The European Central Bank renewed its pledge to conduct emergency bond-buying at a “moderately” slower pace, holding its nerve even as surging inflation prompts investors to advance unwelcome bets for interest-rate increases.
Hours after Spanish data showed the biggest price gains in three decades, the Governing Council on Thursday maintained prior language heralding plans to reduce monthly purchases from the roughly 75 billion euros ($86.9 billion) deployed from March through September. They also promised to keep the 1.85 trillion-euro program, known as PEPP, running until March 2022 or later if needed.
A decision slated as a quiet prelude to December’s showdown over the future of emergency stimulus became more fraught this week when financial markets signaled disbelief at the ECB’s commitment to ultra-low interest rates. Investors are now betting that policy makers will drastically pivot from extraordinary crisis support to delivering a 20 basis-points in hikes in little more than a year.
With inflation now at 5.5% in Spain, a faster-than-anticipated 4.6% in Germany, price expectations in the euro-zone at the highest since 1993, and data in the coming 24 hours due to show acceleration elsewhere, President Christine Lagarde now has the task of recalibrating the market’s view at a virtual press conference at 2:30 p.m. in Frankfurt.
She will likely also face questions on a major policy overhaul slated for the forthcoming meeting, when new economic projections will give officials a better view on future stimulus needs. Economists predict the central bank will then lay out a path for its pandemic emergency purchase program -- known as PEPP -- and end it after March 2022, as currently envisioned.
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The ECB’s path of continued emergency stimulus contrasts with the focus of central banks from New Zealand to the U.K. which have begun raising rates or signaling plans to do so in response to rising prices across the globe stoked by higher energy costs and acute supply bottlenecks. That backdrop has encouraged investors to ask if the Frankfurt institution might not end up following suit.
Numerous ECB officials, however, have insisted the euro area is in a different state than other advanced economies and remains reliant on support. They point to a lack of wage pressure as evidence that underlying price risks just aren’t there.
Others have warned that inflation could indeed turn out faster than expected, and that ultra-accommodative policy shouldn’t continue for too long.
Those differing views have fueled an increasingly vocal debate on post-crisis policy. Officials including Italy’s Ignazio Visco, argue the flexibility of PEPP should remain in some form, while Estonia’s Madis Muller and Klaas Knot from the Netherlands aren’t keen. France’s Francois Villeroy de Galhau, prefers having a “contingent option” that could be activated during periods of market turmoil.
The majority of economists surveyed by Bloomberg predict the ECB will ultimately commit to spending as much as needed under its conventional asset-purchase program to maintain favorable financing conditions, with other tweaks to help it address market stress possible, too.
On Thursday, policy makers also took the following decisions:
- The deposit rate remains at -0.5%
- Interest rates won’t rise until projections show inflation sustainably at 2% and underlying price pressures are consistent with that goal
- An older asset-purchase program continues at 20 billion euros a month
- Long-term loans to banks will continue to support lending
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