ECB Keeps ‘Significantly Higher’ Language As Hawks Routed

The ECB reiterated Thursday that asset purchases under its emergency pandemic program (PEPP) will continue at a “significantly higher” pace, as the bloc’s fragile recovery unfolds.

In March, when global bond yields surged and market participants whispered about a “vigilante” revolt, the ECB set about tamping down speculation that the pace of PEPP purchases didn’t communicate enough urgency to quell the burgeoning tantrum.

Purchases under PEPP would “be conducted at a significantly higher pace” in the second quarter, the March statement read.

Fast forward to June and that language was unchanged. Specifically, the following passage remained in the statement:

Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects net purchases under the PEPP over the coming quarter to continue to be conducted at a significantly higher pace than during the first months of the year.

This (non)outcome was largely expected, and as such, it’s probably for the better that no surprises were forthcoming. Rates markets weren’t priced for any significant tweaks to the guidance, let alone an outright omission of the “higher pace” bit.

“Despite recent ECB commentary, we maintain our view that the Governing Council will slightly slow the PEPP pace in Q3, but we expect the ECB to maintain the ‘significantly higher’ pace language in the June decision to deflect tapering concerns, and guide towards slower purchases on account of market conditions and seasonality in Q3,” Goldman wrote, ahead of Thursday’s decision.

Obviously, PEPP’s firepower remained unchanged at €1.85 trillion. “Regular” QE will continued at €20 billion per month in what they may as well just call perpetuity.

The rest of the June statement was predictable. Again: There are no surprises here and while the press conference will produce the usual collection of sighs and shrugs as market participants fret over every ostensible inconsistency emanating from Christine Lagarde, the message is clear enough. Europe is nowhere near any kind of economic inflection point that would prompt the ECB to dial back stimulus.

“The ECB just announced… well, the ECB didn’t announce anything new,” ING’s Carsten Brzeski remarked. “It is an almost verbatim copy of the April decision,” he added. “With hard data not yet matching the optimism reflected in strong soft indicators, the ECB is currently choosing to err on the side of caution.”

To quickly recap, inflation is technically at target (figure below), but I emphasize “technically.” It isn’t sustainable. Generally speaking, there’s much less in the way of concern that inflation in Europe will take off and not recede than there is in the US.

In suggesting that no PEPP taper is imminent, Morgan Stanley last week cited tighter upstream financing conditions, risks to the recovery, a weak medium-term inflation outlook and “an absence of commentary from more hawkish members of the Governing Council” in the face of vocal doves.

Indeed, the hawks seem to have lost this one wholesale, assuming they even tried to put up a fight.

Full ECB June statement

10 June 2021

At today’s meeting, the Governing Council decided to confirm its very accommodative monetary policy stance:

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively. The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.

The Governing Council will continue to conduct net asset purchases under the pandemic emergency purchase programme (PEPP) with a total envelope of €1,850 billion until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over. Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects net purchases under the PEPP over the coming quarter to continue to be conducted at a significantly higher pace than during the first months of the year.

The Governing Council will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation. In addition, the flexibility of purchases over time, across asset classes and among jurisdictions will continue to support the smooth transmission of monetary policy. If favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full. Equally, the envelope can be recalibrated if required to maintain favourable financing conditions to help counter the negative pandemic shock to the path of inflation.

The Governing Council will continue to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2023. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

Net purchases under the asset purchase programme (APP) will continue at a monthly pace of €20 billion. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

The Governing Council also intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

Finally, the Governing Council will continue to provide ample liquidity through its refinancing operations. The funding obtained through the third series of targeted longer-term refinancing operations (TLTRO III) plays a crucial role in supporting bank lending to firms and households.

The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry.