ECB Attempts A Sorta-Taper

Hawkish banter from some ECB officials in the lead-up to September’s policy meeting wasn’t a bluff.

The pace of purchases under the bank’s pandemic QE program (PEPP) will be “moderately lower” versus the past two quarters, the new statement said.

That’s a pseudo-taper. And it means I’m compelled to briefly recapitulate for context.

Earlier this year, the ECB stepped up the pace of PEPP purchases amid concerns that bond yields might rise, thereby tightening financial conditions. That was in March. The updated language around the pace of PEPP buying (“significantly higher”) was retained through June. Then, in July, Christine Lagarde unveiled what I described as “comically belabored” rates guidance designed to reinforce the ECB’s commitment to achieving its inflation goal following a policy review and the adoption of a symmetric 2% target, an ostensible improvement versus the old guidance, which was deemed too weak and too vague.

Inflation in the eurozone is above target on the headline, but well short on core (figure below). The spike is likely to be “transitory,” and before you roll your eyes, note that you can’t have it both ways. Some of the very same people who spent the last decade breathlessly documenting Europe’s economic “Japanification” are now keen to jump on the inflation bandwagon, not because there’s a solid economic rationale, but rather because inflation has temporarily replaced deflation as the doom narrative du jour in bearish circles.

Last week, there was talk of a “tantrum” when Robert Holzmann suggested it was time to start the discussion around trimming the pace of purchases under PEPP. Klaas Knot echoed those sentiments.

The ECB is, of course, running two QE programs simultaneously. There’s “regular” QE and then there’s PEPP. The pace of purchases under regular QE will continue at the usual pace of €20 billion per month, but the ECB on Thursday reckoned that favorable financing conditions can be maintained with a slower pace of PEPP buying. That assessment is based on current conditions and the inflation outlook.

The total PEPP envelope is still €1.85 trillion. As of end-August, cumulative purchases were around €1.34 trillion (figure below).

As usual, the ECB retained its optionality. “If favorable 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,” the new statement reiterated. “Equally, the envelope can be recalibrated if required to maintain favorable financing conditions to help counter the negative pandemic shock to the path of inflation.”

“It’s not tapering but a very tentative sign that tapering could eventually come,” ING’s Carsten Brzeski said Thursday, calling the end of front-loading “a small victory for the hawks.”

Still, there was no indication that the program will be wound down early. PEPP buying will continue until the end of March 2022 at least and/or until the ECB “judges that the coronavirus crisis phase is over.”

You can probably expect markets to take this largely in stride, but it’s notable nevertheless. As I put it last week while previewing the September ECB meeting, “don’t sleep on this one.”


 

Leave a Reply to Feed on PainCancel reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

3 thoughts on “ECB Attempts A Sorta-Taper

  1. The Hawks are confused, primarily because they have anticipatory anxiety about what the future holds. The ridiculous notion that the pandemic has passed and that growth is exploding is offset by the reality that global supply chains are still in shock as-is the global economy. The supply shocks are part of the immediate future, more so than inflation. The shocks will force some prices up, but IMHO growth rates have been in a a slow decline for months. Bond rates reflected slower growth back in March as the concept of tapering began to be hyped. The taper jawboning game will be with us for a few years, versus something that may happen any day.

    This is a snip from Twitter this morning:

    “”My expectation is the window to taper is closing,” says
    @elerianm
    . “The market is absolutely right in saying that we are not likely to get an announcement until December…and yet yields are edging higher because yields are also starting to recognize the supply disruptions.”:

    ==> If supply chains are seriously impacted today, growth will slow further and yields will most likely go down … as usual.

    1. Yes, though as someone was pointing out, it makes no sense to try and deal with specific supply shocks with monetary policy. Inasmuch as anything is possible, it has to be done at the fiscal level, like, IDK, support targeted at restaurants or the leisure sector in general.

NEWSROOM crewneck & prints