ECB to Count Risks in Setting Bond-Buying Pace: Decision Guide

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The European Central Bank will have to decide on Thursday whether the recovery is strong enough to warrant an imminent slowdown in monetary stimulus. 

Policy makers in Frankfurt are due to settle on how much bond buying the economy will need in the fourth quarter, weighing risks to the outlook such as the delta variant and supply-chain bottlenecks against data pointing to a robust rebound in the 19-nation euro region. 

Their conclusion will also be based on a new set of economic projections, which are likely to confirm that the latest surge in euro-area inflation to a 10-year high is temporary -- even as underlying price pressures are starting to rise.

The meeting marks the beginning of a crucial period for the ECB, with a flagship 1.85 trillion euro ($2.2 trillion) purchase program to contain the Covid-19 crisis on track to expire in March. Governing Council members have begun to stake out their positions on what to do next, though they’re widely expected to put off major decisions until later this year. 

The ECB will make its policy announcement at 1:45 p.m. Frankfurt time, and President Christine Lagarde will hold a virtual media briefing 45 minutes later.

Bond Buying

One decision the ECB won’t be able to duck is whether to adjust the pace of bond purchases under its pandemic program. Officials have been doing that on a quarterly basis.

The institution has bought debt worth around 80 billion euros a month, after stepping up purchases in March to a “significantly higher” level than at the start of the year. Some officials have already called for a slowdown, citing a strong recovery, accelerating inflation and lower financing costs faced by governments, companies and households.

Most economists expect the ECB to heed those calls on Thursday, while leaving options about the future of the program open. 

“The challenge will be to convince the market that this is not tapering,” said Silvia Ardagna, an economist at Barclays Plc in London. “Even though the macro outlook is much improved, the medium-term inflation projection is likely to be far from the 2% inflation target,” she said.

Bloomberg economics predicts purchases will continue at the current pace for another quarter, before buying will slow in January and end in March.

Better Outlook

The euro-area economy grew 2.2% in the second quarter, more than initially reported, and recent data indicate that momentum has remained strong. 

At the same time, manufacturers are grappling with backed-up supply chains and higher costs that they’ve started to pass on to clients. Virus infections are also on the rise, threatening a setback in services if consumers stay home. 

Economists polled by Bloomberg still expect the ECB to upgrade its growth projection for this year, while keeping those for 2022 and 2023 unchanged. 

They also said the inflation outlook will be revised up for this year and next after prices rose an annual 3% in August, a rate not seen since 2011. Further out, many expect inflation to remain stuck well below the ECB’s goal. 

Future Stimulus

Weak medium-term prospects for inflation mean bond-buying will continue even after pandemic stimulus ends. The ECB is currently spending 20 billion euros a month under an older program which could be expanded next year.

Economists expect it to be temporarily doubled starting in April. One key issue of interest beyond the purchase pace is whether the program will need more flexibility, for example by softening constraints on how much of each nation’s debt the central bank can buy. 

Following the adoption of the ECB’s new inflation target and a subsequent change to its guidance on interest rates, some officials have also pushed for a looser link between bond buying and future borrowing costs. As things stand, purchases will continue until “shortly” before rates start rising. 

While investors will listen closely for any hints on how these discussions develop, they’re not counting on decisions until later this year. 

©2021 Bloomberg L.P.