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Christine Lagarde (right), President of the European Central Bank (ECB), and Vice President Luis de Guindos (left)
Thomas Lounes | Getty Images News | Getty Images
FRANKFURT – Even as the whole world prepares for a return of inflation, market participants in Europe expect the European Central Bank to keep the stimulus pedal ahead this week.
Talk of “diminishing” bond purchases in the era of the pandemic has peaked in many parts of the world, but many believe the ECB will continue on its current path due to the uncertain economic outlook and to avoid an unwanted tightening of financial conditions.
“It’s a close call, but we tend to keep the ECB pace of buying,” Mark Wall, chief economist at Deutsche Bank, said in a research note.
He added: “The pessimistic tendency in the ECB’s Governing Council suspension in the past two weeks – the doves were pessimistic, the hawks were not hawks – means the board is not in the mood to take risks.”
Inflation has risen to levels not seen in a long time but the key questions are: How reliable is the current data as Covid-19 has changed consumption habits leading to a potential data misrepresentation? and b) how long will inflation continue to reinforce the post-lockdown effect?
“Reopening economies now will increase prices in the sectors most affected by the shutdowns, whether as a result of recovering previous losses or exceeding higher costs,” explained Carsten Brzeski, ECB Observer at the European Central Bank. ING Diba, in a research note.
“The effects will be temporary but could easily last until the summer of next year, keeping inflation high for a while,” he said.
Recent economic data suggests that as vaccinations begin and lockdown measures ease across Europe, the Eurozone economy will rebound strongly starting in the second quarter of this year.
This could also lead the Frank First-based European Central Bank to reassess the risks of the economic outlook from its “swinging to the downside” position, to a “balanced” one, according to Dirk Schumacher, ECB observer at Natixis.
The European Central Bank at Thursday’s meeting will update its quarterly inflation and growth forecasts, along with its traditional rate decision and press conference.
“We also expect a slightly upward revision to growth, especially because US fiscal stimulus was not fully integrated in March, while inflation this year and next may rise slightly,” Anatoly Annenkov, an economist at Societe Generale, said in a research note.
The main question is when will the European Central Bank begin to scale back its massive stimulus programme.
In the wake of the coronavirus pandemic, the European Central Bank launched the Pandemic Emergency Purchase Program, or PEPP, which buys bonds in the region to stimulate lending and fuel economic recovery. It left that program unchanged at its March meeting, with the target purchase amount remaining at 1.85 trillion euros ($2.21 trillion) – which is set to run through March 2022.
Most observers believe it will start tapering off in September, which means there will be plenty of room to explain his thinking during the Sintra central banking conference at the end of that month. But as always, withdrawing monetary stimulus is a difficult process and markets can react violently.
“The longer the ECB waits before recognizing that the rationale for operating the Pandemic Emergency Purchase Program (PEPP) at full speed is no longer as robust as it was in March, the less subtle the transition to lower asset purchases in the future will be,” adds Holger Schmieding, chief economist. In the Berenberg Company.
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