Christine Lagarde (R), President of the European Central Bank (ECB), and Vice-President Luis de Guindos (L)

Thomas Lohnes | Getty Images News | Getty Images

FRANKFURT – With a policy change off the table this week, European Central Bank monitors need to closely monitor the details of their pandemic recovery plan as policy makers wait for more data before taking decisive action.

Recent economic data suggest a stronger-than-expected economic recovery and further coronavirus lockdowns across the euro area are unlikely to warrant further central bank action.

“A change in political stance is unlikely,” said Mark Wall, chief economist at Deutsche Bank, in a research note.

“A decision on whether or not to maintain the new, faster pace of PEPP purchases will be made after a joint assessment of funding conditions and inflation outlook at the June 10th Council meeting,” he added, suggesting no updates for the meeting on Thursday before this week.

PEPP accelerated

In the aftermath of the pandemic, the ECB launched its Pandemic Emergency Purchase Program (PEPP), which is used to buy bonds in the region to boost lending and fuel an economic recovery. The program was left unchanged at its March meeting. The target purchase amount was still 1.85 trillion euros (2.21 trillion US dollars) – which should last until March 2022.

However, it was decided to speed up bond purchases on a monthly basis to ease upward pressure on government debt yields in the region – which had meant more expensive refinancing for euro area countries or tightening financial conditions.

“The PEPP purchases in March amounted to 74 billion euros,” said Wall. “That was significantly more than the 53 billion euros and 60 billion euros in February and January.”

However, if you look at the minutes of the March Governing Council meeting, it is clear that opposition to rising yields was not as extensive as it first appeared.

“The decision to significantly accelerate the pace of buying would show that the Governing Council was willing to take advantage of the flexibility of the program without changing the overall scope or duration of the program,” the reports from the March meeting said. The tone of the accounts can best be described as a balancing act between the pigeons and the hawks at the ECB.

Hawks talk

There are increasing signs that the economy will recover strongly in the second half of the year.

The improved outlook has prompted some policymakers to opt out and point out that they are leaving the PEPP.

Pierre Wunsch and Klaas Knot, the Belgian and Dutch central bank governors, respectively, have started discussions on a possible PEPP exit, with the latter suggesting it could take place as early as the third quarter of this year.

“If the economy moves along our baseline, we will see better inflation and growth from the second half of the year,” Knot said earlier this month. “In this case, it would be just as clear to me that we can begin to phase out pandemic emergency purchases gradually from the third quarter and end them as planned in March 2022.”

This appears to be the start of a discussion that is likely to gain momentum as the summer progresses.

“We doubt this will be priced in by the markets, but we agree that the PEPP exit will be the key issue for the ECB in the summer as the pace of economic recovery is expected to pick up rapidly in the second half of the year Inflation is expected to rise, “Anatoly Annenkov, an ECB observer at Societe Generale, said in a research report.

“It will be difficult to significantly decrease the PEPP ahead of the (Federal Reserve) that we currently expect to decrease in early 2022,” he added.