ECB - A dovish taper
Below we set out the key announcements the ECB made in its monetary policy statement this afternoon. Overall, the end of the PEPP is cushioned by a longer period of reinvestments under the PEPP and a stepped up APP that will likely run through 2022.
In addition, its 2024 inflation projection (which we expect to be slightly below target - to be published shortly) will signal a longer period of unchanged policy rates. Overall, this amounts to a very dovish taper. The key points are as follows:(1) PEPP ends in March 2022 and purchases will slow further up until that point (2) PEPP reinvestment to continue to end 2024 at least (previously end 2023) (3) In the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time, including skewing towards Greek bonds. Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic. (4) Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic. APP monthly net purchase pace to be EUR 40 billion in Q2 and EUR 30 billion in Q3. From October 2022 onwards, pace will be back to EUR 20bn but for as long as necessary to reinforce the accommodative impact of its policy rates. (5) The Governing Council expects net purchases to end shortly before it starts raising the key ECB interest rates (‘shortly before’ defined at 6-12 months by some GC members) (6) Reiterates forward guidance on policy rates. GC states that ‘key ECB interest rates to remain at their present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon’ (7) We expect new ECB forecasts to show inflation slightly below target in 2024. This will rule out rate hikes in 2022 and likely 2023 as well