While a reduction in bond purchases in the USA (“tapering”) has been discussed on the capital markets since the beginning of the year, this will not be an issue for the European Central Bank (ECB) for the foreseeable future. It was not until December 2020 that it increased its monetary policy again and increased its Pandemic Emergency Purchase Program (PEPP) by 500 billion euros to 1,850 billion euros and extended the entire term to at least March 2022. It did so against a backdrop of weaker economic growth, persistent failure to meet the inflation target, and high levels of economic uncertainty as a result of the pandemic.
This has not changed since the last ECB meeting. On the contrary, especially for the current first quarter, the lockdown measures that have already been decided in the EMU countries point to a renewed decline in GDP. In this respect, the ECB should see its risk assessment confirmed at the meeting on January 21, despite the vaccinations against the Corana virus that have started. Therefore, she shouldn’t change anything in her communication. In concrete terms, this means: It is likely to continue to be willing to step up monetary policy again in an emergency. And it should at all costs avoid any signs that could be interpreted as “restrictive”.
The question is rather whether the ECB will have to step up again if the already cautious GDP growth projection of 3.9 percent for 2021 has to be revised downwards due to the longer-lasting lockdowns. We don’t believe Although the economic recovery is likely to suffer a relapse in winter, the availability of the vaccine from several suppliers has increased the chances of a significant recovery from summer 2021. With its monthly purchases, the ECB will continue to ensure favorable financial conditions (“financing conditions”). The volume of the PEPP is sufficiently measured based on the average monthly purchases of the last few months. It even contains a kind of “safety margin” in the event that a higher purchase volume might be necessary in the event of possible market distortions. Against this background, the ECB should drive on sight in the coming months. The decision on how to proceed should then be made in the second half of the year, once the strategy review has also been completed. But it would be an illusion to expect that something would change in the fundamentally expansionary orientation of monetary policy.
Author: Ulrike Kastens, European economist