ECB to slow asset purchases ‘moderately’ as economic outlook improves

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The European Central Bank will buy fewer bonds for the rest of the year in response to improved economic and financial conditions, while saying it could increase its stimulus again if the eurozone outlook worsens.

After a two-day meeting of its governing council concluded in Frankfurt on Thursday, the ECB said it had decided to move to “a moderately lower pace” in its €1.85tn Pandemic Emergency Purchase Programme (PEPP) from the €80bn-a-month level it has run at since March.

“Based on a joint assessment of financing conditions and the inflation outlook, the governing council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters,” the ECB said in a press release.

Italian 10-year bonds rose modestly in price, pushing the yield down 0.04 percentage points to 0.716 per cent. The PEPP has been a boon to the bonds of more indebted euro area countries, which sold off sharply during the height of the coronavirus crisis in markets last year. Bond yields fall as prices rise.

The decision to slow the PEPP, the ECB’s flagship policy response to the pandemic, follows a strong rebound in eurozone growth and inflation, as rising coronavirus vaccinations have helped to end lockdowns and boost business and household activity.

ECB president Christine Lagarde is expected to present the move as different to the tapering being done by other central banks around the world because it is not planning to end its bond-buying yet and is only adjusting its pace.

In contrast, the US Federal Reserve and the Bank of England have said they plan to taper their asset purchases this year. Central banks in Canada, New Zealand and Australia have already done so.

Still, economists said the ECB’s shift jarred with its new strategic commitment to maintain “forceful and persistent” monetary support until inflation reaches its 2 per cent target over the medium term. The ECB forecasts that will not happen for several years, despite inflation hitting a decadal high of 3 per cent in August.

“The market has been interpreting the ECB as a bit of a dovish standout amid the global move towards less monetary policy support,” said Paul Diggle, deputy chief economist at Aberdeen Standard Investments. “I think that’s how they want to be viewed. But a PEPP reduction runs somewhat counter to that.”

Seema Shah, chief strategist at Principal Global Investors, said: “It is the first step towards tapering and investors will be listening closely to clues about the eventual wind down of PEPP.”

The ECB has €500bn left to spend under the PEPP and said the scheme would continue until at least March 2022, or until the council decided “the coronavirus crisis phase is over”. Even at a reduced pace of €60bn to €70bn a month, analysts say the PEPP still has enough firepower to soak up all the new debt issued by governments for the rest of the year.

Council members left the door open to future increases in the bank’s bond-buying pace, saying it would “purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation”.

The ECB is set to continue buying bonds even after the PEPP ends and most other central banks stop their purchase programmes altogether. Its traditional asset purchase programme is still running at €20bn a month and is likely to be expanded and made more flexible when the PEPP ends. A decision on that is not expected until December.

The central bank will also publish updated forecasts later on Thursday. Most analysts expect it to raise its predictions for inflation this year and coming years, even though price growth is expected to fade next year and remain below the ECB’s target throughout 2023.

Additional reporting by Adam Samson in London