European Central Bank Update
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The European Central Bank will purchase fewer bonds for the rest of this year to cope with the improvement in economic and financial conditions, while stating that it may increase stimulus measures again if the outlook for the euro zone deteriorates.
After ending a two-day management committee meeting in Frankfurt on Thursday, the European Central Bank stated that it had decided to shift its 1.85 billion euros pandemic emergency purchase plan (PEPP) from 80 billion euros to a “moderate slowdown”. It has been at the monthly level since March.
The European Central Bank stated in a report: “Based on a joint assessment of financing conditions and inflation prospects, the Management Committee believes that under the condition that the pace of net asset purchases under PEPP is slightly lower than in the previous two quarters, favorable financing conditions can be maintained. .”Press release.
The price of Italian 10-year government bonds rose slightly, and the yield fell by 0.04 percentage points to 0.716%. PEPP is a boon for the bonds of the more indebted euro area countries, which sold off during the worst of the coronavirus crisis in the market last year. Bond yields fall as prices rise.
Decide In order to slow down the European Central Bank’s flagship policy in response to the pandemic, PEPP Rebound Economic growth and inflation in the Eurozone, as the increase in coronavirus vaccination helps end the lockdown and promote business and family activities.
The President of the European Central Bank, Christine Lagarde, is expected to say that this is different from the scale of reductions that other central banks around the world are taking, because it has not yet planned to end bond purchases, but is just adjusting its pace.
In contrast, United States Federal Reserve with Bank of England It has been stated that they plan to reduce the scale of asset purchases this year. The central banks of Canada, New Zealand and Australia have already done so.
However, economists say that the ECB’s change is inconsistent with its new policy Strategic commitment Maintain “strong and lasting” monetary support until inflation reaches the 2% target in the medium term. The European Central Bank predicts that although inflation reached a 10-year high of 3% in August, this situation will not happen in a few years.
Paul Diggle, deputy chief economist at Aberdeen Standard Investments, said: “As the world shifts towards reducing monetary policy support, the market has always interpreted the European Central Bank as a bit dovish.” “I think this is how they want to be seen. But lower. PEPP goes against this.”
Seema Shah, chief strategist at Principal Global Investors, said: “This is the first step in downsizing. Investors will pay close attention to clues about the eventual closure of PEPP.”
The European Central Bank still has 500 billion euros available for PEPP, and said that the plan will continue at least until March 2022, or until the Council decides that the “coronavirus crisis phase is over”. Even with a slowdown of 60 billion euros to 70 billion euros per month, analysts said that PEPP still has enough firepower to digest all the new debt issued by the government for the rest of the year.
The board members opened the door for the bank to accelerate the pace of debt purchases in the future, saying that it would “flexibly purchase according to market conditions to prevent tightening of financing conditions, which is inconsistent with responding to the downward impact of the pandemic.” The expected path of inflation”.
The European Central Bank is set to Continue to buy bonds Even after PEPP ended and most other central banks completely stopped their purchase plans. Its traditional asset purchase plan is still running at a rate of 20 billion euros per month, and may expand and become more flexible at the end of PEPP. A decision is not expected to be made until December.
The central bank will also release updated forecasts later on Thursday. Most analysts expect it to increase inflation forecasts for this year and the next few years, although price growth is expected to slow next year and stay below the ECB’s target throughout 2023.
Additional reporting by Adam Samson in London