ECB’s Stimulus Exit Path Emerges With Inflation at Record Pace

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The European Central Bank will seek to cushion the exit from emergency bond-buying next year before a stronger inflation outlook allows for an end to all quantitative easing in 2023, according to economists polled by Bloomberg.

Policy makers will decide on Thursday to stop net purchases under their 1.85 trillion-euro ($2.1 trillion) pandemic plan in March, the survey shows, with a temporary boost to the pace of its regular program expected to soften the impact. Just under half of respondents expect the first interest-rate increase in more than a decade the following year.

The answers provide a glimpse into how the ECB could retreat from its ultra-loose policy after inflation surged to nearly 5%, the highest since the start of the euro. While President Christine Lagarde -- unlike Federal Reserve Chairman Jerome Powell -- considers the trend transitory, it’s still unclear how quickly the rate will fall back below the ECB’s 2% goal. 

The ECB has billed its Dec. 16 Governing Council meeting as the moment to decide on its future stimulus path. A new spike of Covid-19 infections in the region and the emergence of the omicron variant have clouded the picture however. 

“The ECB will need to acknowledge that high current inflation and near-term upside risks justify the removal of some of the ECB’s emergency policy support,” said Oliver Rakau, an economist at Oxford Economics. “But equally, the dovish core of the council will want to avoid a premature tightening.”

Purchases under the pandemic plan should slow to 50 billion euros per month in February, economists said. The ECB bought about 68 billion euros in both November and October. 

Respondents expect regular bond-buying, currently running at 20 billion euros per month, to be doubled in the second quarter and to gradually return to its current volume by October. A three-month taper toward zero should then start in July 2023. 

What Bloomberg Economics Says...

“The ECB may refrain from announcing next week exact numbers in terms of the amount and/or duration of APP buying and prefer a vaguer commitment on the expansion of purchases that will be reviewed in the new year as more information on omicron becomes available.”

-- David Powell and Maeva Cousin. For full preview click here

A key concern for policy makers is whether the ECB should retain some of the flexibility of its pandemic tools to respond to any disruption on euro-area bond markets beyond March. Some have suggested that the emergency program -- whose holdings will be reinvested at least through 2023 under current plans -- may continue to play a role. 

Officials with knowledge of the matter have said the ECB could expand the period in which it rolls over maturing securities and apply more flexibility to the geographic allocation of such purchases. 

The majority of surveyed economists predict the ECB will use reinvestments strategically to address potential market fragmentation. More than 40% said the central bank could restart the program if needed, with about a fifth expecting a new plan.

“The exit from the PEPP may not be full, i.e., the end of net purchases on 31 March 2022 will remain conditional on the pandemic emergency to fade” early next year, said Luca Mezzomo, economist at Intesa Sanpaolo. “Net purchases may be resumed afterward if needed.” 

With surging coronavirus cases across the region triggering new lockdowns and curbs, the pandemic re-emerged as the biggest concern for those polled. By contrast, worries over supply-chain problems that have hampered manufacturers receded. 

Economists said the ECB’s inflation forecasts will be raised even as next year’s outlook for economic growth is expected to be lowered. In September, the ECB saw inflation slowing to 1.7% in 2022 and 1.5% the following year.

The latest round of projections will include first estimates for 2024.

“The ECB will continue to stress that the surge of inflation is temporary,” said Joerg Angele at Bantleon Bank AG. “However, it will admit that inflation will take longer to come down again and therefore will be much higher in 2022 than shown in the September projections.”

The majority of respondents doesn’t expect the central bank to announce a new round of long-term loans to banks. That’s in line with recent comments from policy makers including Executive Board member Isabel Schnabel saying an extension of the program doesn’t have to be decided next week. 

©2021 Bloomberg L.P.