Global Daily – ECB ready to take on the bond market

The ECB therefore decided to take action, committing that ‘purchases under the PEPP over the next quarter (will) be conducted at a significantly higher pace than during the first months of this year’. It was further clarified that the 3-month period would begin tomorrow.

The latest weekly PEPP net purchase number stood at EUR 11.9bn, while the average so far this year is not much higher. This compares to weekly averages of roughly EUR 25-30bn at the height of the crisis, so there seems to be considerable room for the ECB to step up purchases. The exact size of the step up over time will depend on the ECB’s success in curbing bond yields.

The Executive Board has the power to decide on the pace and composition of PEPP purchases. However, it felt that this was a matter for the Governing Council, as an acceleration of purchases would mean a change in the monetary policy stance. This explains why the ECB did not change its purchase behaviour before today’s meeting. ECB President Christine Lagarde highlighted that the decision to step up purchases was taken by ‘total consensus’.

It is clear that the ECB has now drawn a line in the sand in terms of curve steepening. This is an important signal as the central bank has significant firepower in terms of the remaining PEPP envelope. In addition, it has other tools it can use. Most importantly, the ECB can enhance its forward guidance to reign in market rate hike expectations. It could do this indirectly by signalling an even longer period of net asset purchases under the PEPP. This could be a credible signal that the deposit rate will remain on hold for longer than markets were pricing in, given that the policy rate will not go up before asset purchases end.  Furthermore, the ECB could add date-based guidance to its current state based guidance. For instance, it could set out exactly when the Governing Council expects that inflation would converge to the target and be reflected in underlying inflation dynamics given current projections. (Nick Kounis)

ECB still forecasts an inflation undershoot in the medium term – The ECB also published its new ECB staff macroeconomic projections for the euro area. These have now been updated to include the realisation of 2020Q4 GDP (which came in at -0.7%, well above the ECB’s December projection of -2.2%) as well as the impact of new lockdown measures that were introduced after the ECB’s December meeting. Consequently, the central bank revised its forecast for GDP growth in 2021 marginally higher (to 4.0% from 3.9%) and in 2020 marginally lower (to 4.1% from 4.2%). The expectation for growth in 2023 (2.1%) remained unchanged. Based on the new quarterly forecasts, the level of GDP would return to pre-pandemic levels around the middle of next year, which is in line with the December forecasts. Ms Lagarde noted in the press conference that the projections did not incorporate the USD 1.9 trillion fiscal package in the US. Though she downplayed the impact on the eurozone, noting that much of it would support the domestic economy in the US. In addition, the ECB President expressed disappointment that fiscal stimulus in the eurozone would take time to kick in.

The ECB’s projections for inflation were also not changed a lot, with  the exception of the forecast for headline inflation in 2021, which was revised significantly higher (to 1.5% from 1.0%). However, according to the central bank the jump in inflation in 2021 was mainly due to temporary factors. Indeed, the ECB expects inflation to decline again after 2021, to 1.2% in 2022, before gradually rising to 1.5% in the final quarter of its projection horizon (2023Q4). Core inflation is expected to be 1.4% on average in 2023, so also well below the ECB target. (Aline Schuiling)