ECB Will Judge Success of Faster Bond-Buying: Decision Guide
Christine Lagarde, president of the European Central Bank departs after addressing the European Parliament. (Photographer: Thierry Monasse/Bloomberg)

ECB Will Judge Success of Faster Bond-Buying: Decision Guide

European Central Bank President Christine Lagarde will be pressured to reveal how much longer the euro area will need intensified support on Thursday, after she and her colleagues hold their policy meeting.

What’s likely is that she’ll say the ECB intends to continue buying bonds at an accelerated pace through June to support financing conditions and help the economy as the pandemic persists. Her views on monetary stimulus in the second half are likely to be much vaguer, despite some of her colleagues publicly starting that debate.

ECB Will Judge Success of Faster Bond-Buying: Decision Guide

The ECB is trapped in a situation in which stubbornly high coronavirus infections are forcing tougher restrictions across much of the 19-nation region, damping output and leaving the economy trailing well behind the U.S. At the same time, progress on vaccinations and joint fiscal aid is fueling optimism that a vigorous rebound is close.

ECB Will Judge Success of Faster Bond-Buying: Decision Guide

With updated projections for growth and inflation not available until June, the Governing Council isn’t expected to make changes to interest rates, asset-purchase programs or bank loans just yet. It’ll announce its policy decision at 1:45 p.m. Frankfurt time, with Lagarde holding a press conference 45 minutes later.

Bond-Buying

The ECB pledged in March to speed up bond-buying under its 1.85 trillion-euro ($2.2 trillion) pandemic emergency purchase program to keep borrowing costs for companies, households and governments across the euro area favorable.

That step came in response to a surge in bond yields globally amid massive fiscal stimulus and the faster U.S. recovery. Policy makers judged the ailing euro-area economy wasn’t ready for higher borrowing costs.

Since then, central banks across the bloc have spent an average of 17 billion euros a week -- a figure that likely understates the actual pace due to this month’s Easter holidays -- up from a pace of about 14 billion euros since the start of the year.

What Bloomberg Economics Says...

“A full assessment of the pace of asset purchases will not happen until June, but the tone of the press conference may offer some hints on the debate to come. The hawks are likely to focus on the successful containment of bond yields and the economic recovery, while the doves will be more cautious.”

-David Powell. Read the ECB PREVIEW

Financing Conditions

German 10-year bond yields are around 7 basis points higher than in March -- at around -0.26% -- while the premium investors demand to hold riskier Italian debt is hovering around 100 basis points, just above this year’s lows.

Still, banks expect to tighten credit standards for businesses and consumers in the second quarter as demand is set to increase. That’s an important issue for Lagarde, who has promised an “holistic” approach to keeping financing conditions favorable that includes companies and households as well as governments.

Unwinding Emergency Aid

While officials have stressed that they intend to keep monetary policy supportive for a long time, some have already embarked on discussions about unwinding emergency measures. France’s Francois Villeroy de Galhau said in a recent Bloomberg TV interview that the ECB “could possibly exit” the pandemic bond program in just under a year, as currently planned.

Most economists surveyed by Bloomberg say the central bank will signal at the end of 2020 that the program will come to a halt in March next year. They also predict the ECB will slow bond-buying by July.

ECB Will Judge Success of Faster Bond-Buying: Decision Guide

Strategic Review

An added complication is the ECB’s strategic review, which was delayed by the pandemic and which is due to conclude this year. Policy makers are assessing how the institution monitors the economy and sets monetary policy.

Officials participated in a seminar on economic and monetary analysis this week as part of that process, according to people familiar with the schedule. An ECB spokesman declined to comment.

The review is likely to result in a change of the central bank’s inflation goal once the exercise concludes in the fall -- roughly around the time when unwinding emergency bond-buying gains center stage.

That’ll leave investors with two important unknowns -- what monetary support officials will provide, and how much inflation they’ll tolerate as the economy recovers.

Fiscal Support

Lagarde is also likely to be quizzed about progress by European Union governments in disbursing joint fiscal stimulus. One hurdle was clear this week when Germany’s constitutional court allowed the country to proceed with approving the 800 billion-euro recovery fund. Poland, where political squabbles have delayed ratification, will likely vote on it in May.

Meanwhile, Italian Prime Minister Mario Draghi -- Lagarde’s predecessor at the ECB -- will outline his plan of stimulus and reforms to parliament in the coming days. The latest blueprint details spending across as many as 16 categories, according to people familiar with the draft.

ECB officials have used many of their recent speeches to stress the need for speedy progress if the euro area wants to cement its recovery. Despite extensive national support, the region’s fiscal stimulus pales in comparison with the $1.9 trillion relief package introduced by U.S. President Joe Biden’s administration.

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