The European Central Bank said it would scale back its crisis bond-buying in response to soaring inflation, but committed to continue asset purchases for at least 10 months and ruled out raising interest rates next year.
The decision, which contrasts with a more aggressive withdrawal of crisis support by the US Federal Reserve and Bank of England this week, led to a fall in eurozone bond markets on Thursday as investors absorbed the ECB’s plan to sharply reduce its bond purchases in 2022.
Christine Lagarde, ECB president, said the eurozone economy had recovered enough to allow a “step-by-step reduction in the pace of asset purchases”. But she added: “Monetary accommodation is still needed for inflation to stabilise at our 2 per cent inflation target over the medium term.”
The central bank said its €1.85tn Pandemic Emergency Purchase Programme (PEPP), launched in 2021, would reduce net purchases next year and halt them altogether in March. But it cushioned the impact by announcing it would expand its older asset purchase programme (APP) from its monthly pace of €20bn, rising to €40bn in the second quarter and to €30bn in the third.
The APP purchases would then continue at €20bn per month after October “for as long as necessary”, it said. The moves mean it will continue bond purchases at a rate well below the near-€90bn a month it operated for much of 2021. Amid so much uncertainty generated by the Omicron coronavirus variant, Lagarde said the ECB wanted to avoid a “brutal transition” to lower levels of purchases.
There was opposition to the plan expressed by a few ECB governing council members, including Germany’s Jens Weidmann, who is stepping down as head of the Bundesbank at the end of the year. One of their criticisms was that the ECB was committing to maintain its stimulus for too long given the upside risks to inflation.
Although the ECB sharply raised its forecast for inflation over the next few years, Lagarde said it was “really making progress” towards hitting its 2 per cent target over the medium term, even if it was “not quite” there yet.
The ECB predicted inflation would increase from 2.6 per cent this year to 3.2 per cent next year. But it said price growth would then fall below its target to hit 1.8 per cent in 2023 and stay at that level in 2024.
Carsten Brzeski, head of macro research at ING, called the ECB decision “a very cautious taper” that was in line with it stopping asset purchases next year and raising interest rates early in 2023.
The price of eurozone government bonds, already on the back foot following the BoE’s decision to raise its policy rate earlier on Thursday, fell further following the ECB announcement.
Germany’s 10-year yield climbed 0.03 percentage points to minus 0.34 per cent. Italian 10-year borrowing costs rose 0.06 percentage points higher at 0.97 per cent. Bond yields rise when their price falls.
The move to halt the expansion of the ECB’s emergency bond purchase scheme was widely expected by analysts, despite a surge in coronavirus infections, as it reflects the recent rise in eurozone inflation to its highest-ever level of 4.9 per cent in November.
Even so, markets had expected slightly more bond buying in 2022 than the total implied by the ECB’s revised plans, according to Richard McGuire, Rabobank strategist.
The sell-off in Italian bonds showed “how sensitised the market is to even modest adjustments in terms of expected ECB support”, he said.
Frederik Ducrozet, strategist at Pictet Wealth Management, calculated the ECB was on track to buy about €480bn of bonds next year, covering about 80 per cent of net debt issuance by eurozone governments, vs more than 120 per cent in the past two years.
“They are really buying more time to see if there will be second-round effects from higher inflation on wage negotiations. It is really all about that,” Ducrozet said.
The euro rose 0.6 per cent against the dollar to $1.136, its highest point in more than two weeks.
In a busy day for the central banks of developed economies, the Bank of England unexpectedly lifted borrowing costs by 15 basis points to 0.25 per cent, while Norway’s central bank raised interest rates in a widely expected move by 25bp to 0.5 per cent. The Swiss central bank, meanwhile, kept its main interest rate unchanged at minus 0.75 per cent.
The ECB, which kept its deposit rate unchanged at minus 0.5 per cent, also extended plans to reinvest the proceeds of maturing bonds in the PEPP until at least the end of 2024.
It said these reinvestments would be “adjusted flexibly across time, asset classes and jurisdictions at any time” to allow it to skew them towards Greek bonds, which it is otherwise prevented from buying because of their low credit rating.
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2021-12-16 12:57:44Z
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