ECB Set to Chart Exit From Pandemic Crisis Mode: Decision Day Guide
The European Central Bank is poised to unveil a gradual withdrawal from extraordinary pandemic stimulus in the face of soaring inflation whose path is further clouded by the omicron coronavirus variant.
At a pivotal meeting on Thursday, President Christine Lagarde is expected to confirm that net bond-buying under the 1.85 trillion-euro ($2.1 trillion) program known as PEPP will end as scheduled in March.
A regular asset-purchase plan may be re-calibrated to smooth the wind down. But in the absence of a consensus on the health and economic dangers posed by the new strain of Covid-19, officials will be keen to retain flexibility and may even delay some decisions.
A survey of purchasing managers released Thursday confirmed the complicated backdrop as rising infections hit activity in the euro zone’s services sector. At the same time, there are signs that manufacturing bottlenecks are easing and price pressures cooling.
Highlighting the bind for policy makers, the Federal Reserve on Wednesday accelerated its own exit from crisis stimulus to stem surging U.S. consumer prices, while at the same time analysts predicted that the Bank of England will postpone an inflation-induced hike in interest rates to assess the economic damage from the latest wave of the pandemic.
Unlike the Fed, the ECB has stuck to its guns on elevated price gains being temporary -- driven by supply snarls and a spike in energy costs that will fade in 2022. While countries like Germany have questioned that assessment, the prospect of an increase in record-low rates remains distant with omicron looming over the continent’s economic revival.
ECB officials will be armed with new projections showing consumer-price growth exceeding their 2% target next year before falling below that level in 2023 and 2024, according to people familiar with the matter.
The initial overshoot will be pounced on by hawks already uncomfortable with inflation near 5% last month -- the fastest pace since the euro came into existence.
But advocates of prolonging high levels of monetary support will feel emboldened by the medium-term outlook, alongside the renewed virus uncertainty.
What Bloomberg Economics Says...
“The ECB could easily re-start purchases if the worst-case scenario were to materialize -- one of the greatest strengths of PEPP has been its flexibility and the Governing Council has not been shy about using it.”
-- David Powell and Maeva Cousin. For full preview click here
The ECB’s announcement is due at 1:45 p.m. in Frankfurt, with Lagarde to hold a virtual media briefing 45 minutes later. Here’s more on what to expect.
- Economists surveyed by Bloomberg expect PEPP purchases to drop to 50 billion euros a month in February from about 68 billion euros in October and November
- Bond-buying under the regular APP program will double to 40 billion euros a month starting in April before gradually slowing, with all asset purchases ending in the final quarter of 2023 -- eight years after they began
- To be able to respond to disruption on euro-area debt markets beyond March, the ECB may tweak how it reinvests maturing debt under PEPP
- Before the meeting even started, euro-area lenders took almost 52 billion euros in the final allotment of ultra-cheap funding from the ECB. A majority of analysts polled by Bloomberg doesn’t expect a new round of so-called TLTROs to be announced on Thursday
- Lagarde will face a barrage of questions on inflation, which she says has reached “the high level of the hump.” Some of her colleagues are edgy about the risk of second-round effects should higher prices stoke wages
- Money markets are betting on a 10 basis-point rate hike next December. Economists disagree: they don’t see one earlier than 2023
©2021 Bloomberg L.P.