European Central Bank meets as Covid lockdowns hamper recovery

FRANKFURT – With a policy change pretty much off the table this week, observers from the European Central Bank will have to keep a close eye on the finer details of its pandemic stimulus program as policymakers wait for more data before taking decisive action.

Recent economic data points to a stronger-than-expected economic recovery, and further blockages of the eurozone coronavirus are unlikely to warrant further central bank action.

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

“A decision whether or not to maintain the new faster pace of PEPP purchases will be made following a joint assessment of financing conditions and inflation outlook at the Council meeting on June 10,” he added, and does not suggest updates to Thursday’s meeting. 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 boost credit and stimulate an economic recovery. It left that program unchanged at its March meeting, with the target purchase amount still at 1.85 trillion euros ($ 2.21 trillion) – which will last until March 2022.

However, it decided to accelerate monthly bond purchases to ease some of the upward pressure from sovereign interest rates in the region – which had led to more expensive refinancing for the eurozone countries or a tightening of financial conditions.

“PEPP purchases totaled 74 billion euros in March,” explains Wall. “This was significantly higher than the EUR 53 billion and EUR 60 billion in February and January.”

But looking at the minutes of the ECB Governing Council meeting in March, it is clear that opposition to rising interest rates was not as comprehensive as it first seemed.

“The decision to significantly accelerate the pace of purchase would demonstrate that the Board of Directors was willing to take advantage of the flexibility of the program, without changing the overall budget or duration of the program,” the meeting’s reports said. March. The tone of the bills can best be described as a balancing act between the pigeons and the hawks at the ECB.

There are increasing signs that the economy will pick up strongly in the second half of this year.

The improved outlook has prompted some policymakers to step out and hint at an exit to the PEPP.

Pierre Wunsch and Klaas Knot, heads of the Belgian and De Nederlandsche Bank respectively, have started discussions about a possible exit from PEPP, with the latter suggesting it could come as early as the third quarter of this year.

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

This seems like the start of a discussion that will likely gain steam over the course of the summer.

“We doubt this will be priced in by the markets, but agree that the PEPP exit will be the main topic for the ECB over the summer as the pace of the economic recovery is expected to pick up rapidly in the second half as inflation is expected to rise, ”Anatoli Annenkov, an ECB watcher at Societe Generale, said in a research note.

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