William Malcolm

European Central Bank To Slow Bond Purchases As Inflation Surges

The European Central Bank (ECB) will slow down bond purchases to support economic growth in the eurozone affected by the covid-19 pandemic. At today’s meeting, the Governing Council of the ECB decided to reduce its monthly purchases of bonds under the emergency pandemic program called PEPP compared to the previous two quarters but did not provide specific figures in its report. So far, the ECB has bought bonds at a rate of about 80 billion euros (two trillion CZK) per month.

“The lady is not declining,” ECB President Christine Lagarde told a news conference explaining the monetary committee’s decision. She used a twist reminiscent of the famous statement of British Prime Minister Margaret Thatcher “the lady does not turn”. “What we have unanimously done today is calibrating the pace of purchases to achieve our goal of favorable financing conditions. We have not discussed what will follow,” she added.

“The Governing Council considers that favorable financing conditions can be maintained at a slightly slower pace of net asset purchases under the emergency pandemic purchase program than in the previous two quarters,” the central bank said. It has set aside a total of EUR 1.85 trillion (CZK 47 trillion) for purchases under the PEPP program and expects it to continue purchasing at least until March 2022.

Analysts in a Reuters poll expected the ECB to reduce the pace of bond purchases over the next three months to 60 to 70 billion euros a month.

At the same time, the central bank reaffirmed its long-term promise to strong stimulus measures if market conditions deteriorate and financial conditions so require. “The Governing Council is ready to adjust all its instruments as necessary to ensure that inflation stabilizes at the target level of two percent over the medium term.”

The main interest rate remains at zero. Purchases of assets under the APP program are also unchanged and will continue at a rate of 20 billion euros per month.

Today, the ECB also improved its forecast for economic growth and inflation for this year. She justified this by saying that the eurozone economy is recovering from a devastating pandemic faster than most experts expected. Lagarde said the eurozone was on track for strong growth in the third quarter and the ECB expects economic activity to be at pre-pandemic levels by the end of the year. She emphasized that the prospects for a future recovery still depended on the continued success of the European vaccination program and the number of people infected worldwide. But the eurozone economy is recovering.

According to the ECB’s baseline scenario, gross domestic product (GDP) will increase by five percent this year, while in June the ECB expected it to increase by 4.6 percent. According to the new forecast, growth could be 4.6 percent next year.

The ECB estimates inflation for this year at an average of 2.2 percent, which is more than 1.9 percent expected in June. Higher commodity prices, production cuts, and rising consumption led the ECB to raise its forecast. Lagarde said the new forecast projected inflation above the ECB’s 2% target, but that current price increases are expected to be temporary and that medium-term inflation will remain well below the target. According to the ECB, inflation should slow to 1.7 percent next year and to 1.5 percent next year.