Sunday, August 14

The ECB will reduce debt purchases to combat escalating inflation

  • The central bank sticks to the script: it ends the bond acquisition program due to the pandemic but increases those in force since 2014

Caught between the need to combat skyrocketing inflation and the new risk to the Economic recovery posed by the omicron variant of the coronavirus, the Banco Central Europea (ECB) has decided this Thursday to stick to the script provided. As it was announced in October, the monetary authority of the euro zone has announced that next March will end to the exceptional program of debt purchase for the pandemic (PEPP) launched in March last year and equipped with 1.85 billion euros (of which 1.56 trillion have already been disbursed). In return, will increase acquisitions of the program launched in mid-2014 (APP) to prevent risk premiums from soaring in the spring and has left interest rates at the historical lows they have been in since 2016.

“The governing council considers that progress in recovery economic and towards its inflation target in the medium term allow a rstep-by-step eduction the pace of your asset purchases over the next few quarters. But an accommodative monetary policy is still needed for inflation to stabilize at the 2% target in the medium term. Given the current uncertainty, the governing council needs maintain flexibility and optionality in the conduct of monetary policy “, has argued the highest governing body of the institution in a statement.

The purchases of the APP, thus, will happen from March of 20,000 to 40,000 million per month in the second quarter of 2022, then down to $ 30 billion a month in the third quarter and back to $ 20 billion starting in October. In November, the ECB bought 88,085 million of debt (68,085 million only with the PEPP). Additionally, the Governing Council has decided to extend until the end of 2024 the period in which it will reinvest the debt purchased through the PEPP that is maturing and has stressed that said program “could be resumed, if necessary, to counteract negative shocks related to the pandemic”.

Between inflation and omicron

The central banks in general, and the ECB in particular because of its mandate (it is only entrusted to bring prices to 2% in the medium term), they are currently facing a devilish situation. With the economic recovery showing symptoms of soft spot, face on the one hand the threat of the variant omicron, which could further slow down activity by causing new restrictions to contain the pandemic. But faced with the incentive to maintain the stimuli that this could entail, the monetary authorities are faced with the monster of a inflation in some dimensions not seen in decades, when achieving price stability is precisely its main reason for being.

The ECB is under pressure from the markets due to the comparison with the Federal Reserve, which this Wednesday announced the reduction of debt purchases to end them in March and three probable rate hikes between mid and late 2022 (from 0-0.25% to 0.9%). The situation in the two economic areas is not, however, exactly the same. The US economy regained its previous GDP level to the pandemic in the second quarter of this year, while the euro zone lags further behind.

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And what is most relevant for central banks: the inflation in the United States amounted in November to 6,8% (the highest since 1982), while the underlying (the one that does not take into account the most volatile components of energy and fresh food) stood at 4.9%, far from the 2% target. In the eurozone, meanwhile, is in the 4,9% (the highest rate since eurostat started measuring it in 1997), with the underlying rate at 2.6%. In Spain, meanwhile, went up to 5,5% last month (the highest since September 1992), with the underlying at 1.7%.

Analysts and investors, in any case, are particularly expectant about the forecast review inflation rate to be presented by the ECB. In September, he calculated that the CPI will average 2.2% this year, 1.7% next year and 1.5% in 2023 (1.3%, 1.4% and 1.5% the underlying). That is to say, that in its forecast horizon the conditions for a rate hike (inflation of 2% in the middle of said triennium, until the end of the same and with an underlying in the same line). In this Thursday’s update, it will include its forecast for 2024 for the first time and the market is waiting to know if in this new horizon it expects it to reach 2%, although it considers it unlikely because it would reduce its margin of action.

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