The ECB assesses bond purchase delays as the economy recovers

Latest information on the European Central Bank

“Grow up or go home” is a favorite way for Christine Lagarde to explain the European Central Bank’s response to the economic genocide caused by the pandemic.

Now the European economy rebound From the Covid-19 crisis, the challenges facing ECB Governor are how large-scale monetary stimulus measures, especially for Southern European borrowers, without central banks delaying recovery or disrupting bond markets. Is it something that should be resolved?

Delicate tasks strengthen the sector within the ECB, and on Thursday, how economists will end the € 1.85 trillion Pandemic Emergency Purchase Program (PEPP), a key bond purchase policy to protect financial markets. I’m hoping to get a glimpse of the crisis first.

Investors expect Lagarde to announce Dial down Economists say inflation is the bigger problem facing central banks in buying PEPP. This has risen to its highest level in 10 years, primarily due to product shortages and a resurgence in demand.

Silvia Aldagna, Chief European Economist at Barclays, said: “The key question is what happens to the purchase of assets after the end of PEPP … and what they expect from inflation.”

The potential for rampant inflation has fueled tensions between the ECB Governing Council’s conservative “hawks” and more “dove” who want to maintain considerable stimulus to support recovery.

For the past 18 months, hawks such as Jensweitmann of Germany, Klaas Knot of the Netherlands and Robert Holzmann of Austria have been stoic in helping the ECB respond to the crisis.

But since the gross domestic product of the euro area, they have become more vocal 2% expansion In the second quarter, it overtook China and the United States for the first time since the pandemic broke out.Inflation has also risen 10 years high level It was 3% in August, well above the ECB’s target of 2%.

The Hawks are worried that inflation will continue to exceed expectations, driven by supply chain bottlenecks, recovery in demand, and household spending on excess savings accumulated during the pandemic. They fear that if the ECB is too late to respond, it will suddenly have to strengthen its policies to prevent overheating of the economy.

Deutsche Bundesbank Governor Weidman warned that “risks are currently on the rise.” speech last week. “If these temporary factors lead to higher inflation expectations and accelerated wage growth, inflation could rise visibly in the long run.”

The ECB will publish the forecast updated on Thursday. Most analysts expect inflation to fall sharply next year and fall below the ECB’s target throughout 2023, but expect to raise inflation forecasts this year and in the coming years. ..

Katharina Utermöhl, senior economist at Allianz, said the recent surge in eurozone inflation seemed more modest on a two-year average, dropping to less than 1.5%. She added: “Reflation is not inflation. Note the basic effect of roller coasters.”

The German Verdi union recently demanded a 5% salary increase from 1.1 million public sector workers, but economists added that there are still few signs that inflation is leading to higher wages. Bars and restaurants Wages have also been raised to fill vacancies in Paris and Berlin.

Jacob Nell, head of the European economic sector at Morgan Stanley, said:

Discussion over Inflation trajectory It will be important in determining the other big issues hanging on the ECB: how much stimulus will the economy get by buying bonds when the PEPP ends next year.

While other major central banks, such as the US Federal Reserve and the Bank of England, are preparing to “taper” asset purchases to zero, the ECB will continue to buy bonds through traditional purchasing programs. This is still running at € 20 billion a month and is expected to double or triple when PEPP ends.

ECB holding as a percentage of eligible universes

The size of the boost is unlikely to be determined by December, but the more controversial issue is More flexibility Part of the PEPP will be transferred to the ECB’s ongoing asset purchase program.

This flexibility allows the ECB to go beyond the self-regulation of owning more than one-third of eligible national bonds. This is much like what has already been done in Germany and the Netherlands.

So far, the government has been able to raise debt levels significantly without worrying too much about costs. However, if the ECB’s firepower to buy more bonds is limited, investor anxiety can significantly increase yields.

Meanwhile, Taka is worried that raising restrictions on sovereign debt purchases could lead the ECB to be accused of violating the EU’s ban on lending to the government. Partially supported By the German Constitutional Court last year.

Spyros Andrewoulos, Senior European Economist at BNP Paribas, said:

The ECB assesses bond purchase delays as the economy recovers

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