ECB Seen Slowing Pandemic Stimulus as Economic Recovery Advances

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The European Central Bank will start slowing down its pandemic bond purchases in the fourth quarter and may not exhaust the whole 1.85 trillion-euro ($2.19 trillion) program before it ends next year, according to economists surveyed by Bloomberg. 

An improved economic outlook will allow policy makers to reduce the pace of buying from 80 billion euros a month in September to about 50 billion euros in March, they said. A decision to terminate the program then, as currently planned, is only expected at the end of the year. 

“It would be premature to decide on when to cease the Pandemic Emergency Purchase Program, but a reduction of the monthly purchases is reasonable -- especially since financing conditions have improved since June,” said Joerg Angele, senior economist of Bantleon Bank AG.

The Governing Council holds its policy meeting next Thursday.

Such a move would come just weeks after Federal Reserve Chair Jerome Powell said the recovery in the U.S. labor market and the inflation outlook could allow the central bank to start withdraw stimulus this year. Most economists in the poll don’t expect these developments to affect the ECB as investors have already adjusted to this scenario.

A slowdown of pandemic bond-buying like the one predicted would leave the ECB about 70 billion euros short of fully using the amount allocated to the program. President Christine Lagarde has said the institution doesn’t need to spend all the money as long as borrowing costs remain favorable. 

What Bloomberg Economics Says

“The easiest option for the ECB would be to keep buying bonds through PEPP at a ‘significantly higher pace’ until the end of the year. The central bank could begin tapering in January and after the program expires, in March, APP could take over the heavy lifting.”

--David Powell and Maeva Cousin. Read the ECB PREVIEW

Respondents did express concerns that supply-chain disruptions -- and to a lesser extent inflation pressures and the threat of new lockdowns -- could weigh on the euro area’s economic outlook. Sentiment indicators have fallen recently, and consumer prices are growing at an annual pace of 3%, the fastest in a decade.

Next week, the ECB will present a new set of forecasts, which economists said will show faster growth this year and upward revisions for inflation for 2021, 2022 and potentially also for 2023. Even so, that result is still likely to be far below the central bank’s goal.

Survey respondents predict interest rates will remain unchanged at least through 2023, in line with the ECB’s new forward guidance. Policy makers pledged in July that they wouldn’t tighten borrowing costs until inflation had sustainably reached 2%.

Economists also don’t see any changes to the rules of an older bond-buying program in the coming months. They expect purchases to be doubled in size for three months right after the end of the pandemic plan, before they’ll slow down to the current 20 billion euros a month in October next year. 

Faster bond-buying would “show the ECB’s renewed commitment to reach its inflation target,” according to Chiara Zangarelli, European economist at Nomura.

Like some of her colleagues, she also suggested that officials could move away from monthly amounts under the program and replace them with an envelope that could be used flexibly to respond to market developments. 

But that’s not a debate anticipated for next week.

“The bigger battle about bond-buying calibration will be set for December,” said Piet Christiansen, chief strategist at Danske Bank. “The ECB has time on their side to wait for further data.”

©2021 Bloomberg L.P.