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The ECB begins its tapering debate as inflation surges

European Central Bank Governor Christine Lagarde spoke at a joint press conference in Lisbon, Portugal.

Oracio Villa Lobos | Getty Images News | Getty Images

FRANKFURT — Market participants are enthusiastic European Central Bank This week, Frankfurt’s financial institutions will meet to discuss stimulus measures for the pandemic era amid rising inflation and strong economic growth.

Some inside and outside the bank believe that it is time for the ECB to cut monetary stimulus as global supply chain problems push up prices for all types of commodities. However, uncertainty about the coronavirus pandemic remains.

“While the ECB may moderate the pace of emergency asset purchases, [the fourth quarter]When and how banks will phase out a large “pandemic emergency purchase program” (PEPP), and whether and which modest standard asset purchase programs (APPs) will be strengthened and further strengthened. We do not expect to announce whether it will be strengthened to the extent. It’s flexible. ” Holger Schmiding, chief economist at Berenberg Bank, said in a research note.

“These important decisions, which are promised to be very controversial, are likely to be postponed to the December meeting,” he added.

An agency led by Christine Lagarde developed a new asset purchase program in March 2020, triggered by the coronavirus, to support the euro area. PEPP is scheduled to end in March 2022 with a potential total envelope of € 1.85 trillion ($ 2.19 trillion).

The ECB currently buys € 80 billion worth of bonds each month under the program, but it is likely to be reduced to € 70 billion at the completion of the board meeting on Thursday, Schmiding added. ..

The ECB also maintains an asset purchase program known as APP in a pandemic that is currently occurring at a pace of € 20 billion per month. The central bank uses this program in combination with PEPP to maintain the economies of 19 member states.

High price for the first time in 10 years

Inflation in the euro area reached a 10-year high of 3% in August. On the other hand, gross domestic product in the second quarter increased by 2% from the previous quarter, which was an upward surprise. As recently suggested by Vice President Luis de Guindos, these developments may encourage the ECB to upgrade its growth forecasts as well.

But there are still questions in the market.

Frederik Ducloset, ECB watcher at Picte Wealth Management, said, “In anticipation of the coming, there are growing concerns about Delta variants, China’s slowdown, the Fed’s tapering and supply-side bottlenecks. It’s unclear how positive the ECB will be. ” Research notes.

It is worth noting the disagreements within the ECB’s board. Some, like Deutsche Bundesbank Jens Weidmann, openly warn of high inflation, while others, like France’s François Birroy de Garhow, emphasize improved funding terms.

However, the noise from the ECB pigeons (the pigeons that support more monetary stimulus) is not very high, so the decline in PEPP execution rates could prove to be less controversial.

The biggest test may be to create harmony within the ECB ranks of the APP. By next year, when PEPP ends, we need to make a decision about the size and flexibility of the APP.

“We reiterate the long-standing view that there are no cliffs in policy support beyond the end of the PEPP. The ECB may announce an APP that is large and inherits some elements of flexibility.” Said Paul. In his research notes, Hollingsworth, BNP Paribas Chief European Economist.

For now, the ECB avoids big moves, but waits for more data instead, And for more evidence that the euro area is really out of the pandemic downturn.

— CNBC’s SIlvia Amaro contributed to this article.

The ECB begins its tapering debate as inflation surges

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