European Central Bank meeting as Covid’s lock-in makes recovery difficult

FRANKFURT – With a policy change off the table this week, European Central Bank viewers will have to pay close attention to details of its pandemic incentive program, as policymakers will have to wait for more information before taking decisive action.

Recent economic figures do point to a stronger-than-expected economic recovery, and further coronavirus lock-ins in the eurozone are unlikely to justify further action by the central bank.

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

“A decision to maintain the new faster pace of PEPP purchases will be taken after a joint assessment of the financing conditions and the outlook for inflation at the June 10 Board meeting,” he added, suggesting that there be no updates for the meeting on Thursday is not. this week.

In the aftermath of the pandemic, the ECB launched its Pandemic Emergency Purchase Program, or PEPP, which buys bonds in the region to stimulate lending and stimulate economic recovery. This left the program unchanged during the March meeting, with the target purchase price at 1.85 billion euros ($ 2.21 billion) – which will last until March 2022.

However, it has decided to accelerate bond purchases on a monthly basis to ease the upward pressure on government debt yields in the region – which has meant more expensive refinancing for eurozone countries or the tightening of financial conditions.

“PEPP’s purchases were 74 billion euros in March,” Wall explained. “It was significantly higher than the 53 billion euros and 60 billion euros in February and January.”

But if we look at the minutes of the ECB’s meeting in March, it is clear that the opposition to rising yields was not as comprehensive as it first appeared.

“The decision to significantly accelerate the pace of purchases would show that the Board of Directors was willing to use the flexibility of the program, without changing the overall envelope or duration of the program,” the March meeting report said. The tone of the accounts can best be described as a balance between the pigeons and the hawks at the ECB.

There are more and more signs that the economy will grow strongly in the second half of this year.

The improved outlook has led to some policymakers already having to retire and point to an exit to the PEPP.

Pierre Wunsch and Klaas Knot, the Belgian and Dutch central bank governors respectively, started the discussion on a possible PEPP retirement, with the latter suggesting that it could come as early as the third quarter of this year.

“If the economy develops according to our baseline, we will see better inflation and growth from the second half,” Knot said earlier this month. “In that case, it will be equally clear to me that we can gradually start phasing out pandemic emergency purchases from the third quarter and ending them as envisaged in March 2022.”

It looks like the beginning of a discussion that is likely to pick up steam over the course of the summer.

“We doubt whether it will be praised by markets, but agree that the exit of PEPP during the summer will be the main topic for the ECB, as the pace of economic recovery is expected to increase rapidly in the second half, while inflation after expectation will rise, “said Anatoli Annenkov, an ECB viewer at Societe Generale, in a research note.

“It will be difficult to substantially reduce the PEPP before the (Federal Reserve), which we will currently begin to reduce in early 2022,” he added.