Markets will be looking for clues on Thursday as to when the European Central Bank might begin unwinding monetary stimulus as economic recovery from the pandemic accelerates and inflation in the eurozone rises above the bank’s target.
The 25-member Governing Council is widely expected to keep rates at all-time lows and maintain its massive bond-buying programs at its six-week meeting.
But as vaccination progress and post-lockdown spending brighten the outlook, ECB President Christine Lagarde can expect a grilling from reporters over how policymakers intend to wean the region’s economy from crisis support.
A similar debate is raging in the United States, where concerns are growing that inflation will soar, forcing the Federal Reserve to cut bond purchases or even raise interest rates to prevent the economy from overheating.
– ‘Avoid rejuvenating talk’ –
The ECB’s most important instrument for cushioning the effects of the coronavirus is the EUR 1.85 trillion emergency purchase program (PEPP), which is scheduled to run until March 2022.
The Frankfurt institute announced in March that it would buy bonds at a “significantly” faster pace in order to calm the nervousness of the market about rising bond yields.
ECB officials have indicated they are cautious about removing support at the first sign of green shoots, leading observers to believe the faster PEPP pace will hold for another quarter.
Lagarde herself has repeatedly stressed that she wants to maintain “favorable financing conditions” until the recovery is firmly established.
But the ECB will “not be able to escape the tapering discussion for long,” said ING banking economist Carsten Brzeski.
“Unless the economy starts to stutter unexpectedly in the summer, the ECB will probably have to change course and reduce its net bond purchases from September,” agreed Berenberg economist Holger Schmieding.
– Exceeding inflation –
The story goes on
The ECB’s massive bond purchases are aimed at keeping borrowing costs down in order to boost spending and investment in the 19-nation currency club.
In addition to PEPP, the ECB is sucking up € 20 billion a month in government and corporate bonds as part of a pre-pandemic program to boost growth and inflation.
The ECB has also offered ultra-cheap loans to banks and set the bank deposit rate at minus 0.5 percent – meaning lenders pay to park excess cash with the ECB.
The aim is to bring inflation “close to but below” two percent, a goal that the ECB has not been able to achieve for years.
But consumer prices have risen rapidly in the last few months, driven by soaring energy prices and temporary factors such as a shortage of semiconductors and raw materials as well as a backlog as entire sectors of the economy come out of a standstill.
Inflation in the euro area reached 2.0 percent in May, outperforming the ECB benchmark and reaching its highest level in almost three years.
However, core inflation, which excludes energy and other volatile items, remains subdued.
Lagarde has promised that the ECB will “see through” the projected brief spike in headline inflation.
The bank will also release updated quarterly forecasts on Thursday, with observers saying inflation forecasts could be revised up from the current 1.5 percent for 2021 and 1.2 percent for 2022.
Economic growth estimates are expected to remain at 4.0 percent this year and 4.1 percent in 2022.
mfp / hmn / rl
