The ECB had their last meeting of the year today. On a statement after the meeting, they announced some changes such as the end of the pandemic purchase programme (PEPP) in March. They also said that the ECB policy “has to stay supportive, flexible and keep options open to make sure inflation stabilizes at our target of 2% over the medium term”.
Until now, the European body has been buying 20 billion euros a month under this programme, but between April and June it will increase purchases to 40 billion (60 billion more than expected for the quarter as a whole). By the third quarter of 2022, purchases will be 30 billion and from October purchases will return to 20 billion euros per month.
Another important point from the meeting has been the higher prices of the energy, and supply bottlenecks, which will continue but should start easing during 2022. As on inflation, they said it will remain above 2% over 2022, however the factors pushing up prices will become weaker eventually.
In addition, the ECB has kept interest rates unchanged at 0%, while the rate on the deposit facility stands at -0.5% and the credit facility at 0.25%. “It is still quite unlikely that we will raise interest rates in 2022, but we are guided by the data,” said its president, Christine Lagarde.
We have also received some insights on how the asset management industry believes the decision made by the ECB will affect the financial sector. We have received insights from Global X ETFs,
Morganne Delledonne, Global Research Analyst Global X ETFs
The rapidly spreading Omicron variant in the region has probably limited ECB’s breadth of action at this meeting. As expected, the ECB hasn’t changed its key benchmark rates but it has confirmed the end of its pandemic stimulus (PEPP) in March. But, Euro and European bond yields gains following the announcement suggest market participants are now anticipating further hawkish actions from ECB as soon as the Omicron wave has passed. PEPP’s reinvestments to the end of 2024 and upwardly revised its bond purchases through the APP seems mostly to avoid any liquidity cliff.
Konstantin Veit, Portfolio Manager at PIMCO
Today’s ECB meeting delivered broadly in line with expectations, with the Governing Council keen to avoid a PEPP cliff-effect on net asset purchases via a gradual transition back towards the pre-pandemic 20bn monthly net QE run rate in Q4 2022.
Contrary to most other central banks and similar to the Bank of Japan, the ECB has been at the effective lower bound on policy rates and conducting net asset purchases already well before the pandemic.
While we expect a gradual reduction in the pace of net asset purchases over time as the pandemic situation improves, it remains less likely that the ECB will end quantitative easing and raise policy rates in the foreseeable future.
We believe the chances for the Euro area encountering a medium to longer term inflation problem are modest, particularly compared to jurisdictions where fiscal policy is traditionally less constrained in taking private sector behavior into account.
Reto Cueni, Senior Economist at Vontobel
The ECB delivered a well balanced adaption of their monetary policy, moving slowly away from their “ultra-expansionary” policy towards an only “expansionary” monetary policy.
So far markets did not react significantly to the ECB’s announcements as they seem to be well prepared by ECB speak ahead of the meeting.
Barring any shocks to our and the ECBs growth and inflation outlook, we expect that the ECB will proceed as announced and stop PEPP purchases in March 2022 and continue with the beefed-up APP program in Q2 and Q3. Thereafter, we expect the ECB to continue the APP purchases at a pace of 20 bn per month during Q4/2022 and Q1/2023 and to prepare markets for a first rate hike in Summer 2023.
Bottom line: We still forecast that the ECB will not conduct a first rate hike before summer 2023 and expect overall net asset purchases to end in spring 2023. Due to the ECB’s data dependency and the high uncertainty around its inflation forecast, we expect quite some market volatility around the Eurozone inflation data and indicators for the coming months.
Also, in line with our expected end of “pandemic emergency measures”, the ECB aims now at stopping the very favorable conditions of the TLTRO III in June 2022 (at which some banks could tap liquidity 50 bps below the depo rate, i.e.. at an interest rate of -1%).
Annalisa Piazza, Interest rate strategist at MFS Investment Management
The ECB December meeting delivered a few indications on the future of post-pandemic monetary policy. Optionality and flexibility remain key factors which will dominate future steps.
Unsurprisingly, the ECB left policy rates unchanged and – given the guidance on QE – implicitly suggested policy rates are not moving anytime soon – highly unlikely in 2022. The set of decisions seem to be a compromise between the more dovish and more hawkish ECB members.
When it comes to PEPP, given the progress in the economic recovery and progress of inflation, a progressive reduction in the ECB asset purchases is fully justified. A slower pace of purchases in Q1 is hardly a surprise, as well as the announcement of the end of PEPP in March 2022. The stress on optionality (to use the remainder of PEPP if needed) and flexibility on re-investments are pre-conditions for future policy as the uncertainty remains elevated. Given additional risks around the pandemic, the ECB left the door open to use some flexibility if needed.
Flexibility in the re-investment programme has been announced, aimed at reducing fragmentation risks. The policy statement made clear that Greece will be included in the PEPP re-investment programme and Lagarde stressed several times that the support to Greece is aimed at avoiding the interruption of policy transmission at a time when the Greek economy is recovering.
As for the future of the ‘regular’ QE programme, the ECB failed to announce an ‘envelope’ to add to the ongoing APP programme. Net QE under APP is expected to be €40bn in Q2, €30bn in Q3 and resume at €20bn in Q3 next year. The open-ended nature of the APP programme remains valid.
The combination between optionality and flexibility, along with the extension of the PEPP re-investments is on the dovish side and the lack of an additional envelope on the APP on the hawkish side suggest there is a strong debate within the Governing Council.
The December ECB projections highlight some downside risk for next year on GDP growth due to the pandemic but prospects remain quite solid in the medium term. Lagarde stressed the importance of a more resilient economy and the support coming from the labour market that is strengthening more quickly than expected. Inflation has been revised up considerably in 2022, due to carry over effects and some persistency in higher prices in the volatile component. However, inflation remains below 2% in 2023 and 2024. Inflation is clearly moving towards the ECB target but risks around the impact of the next waves of Covid still justify an accommodative monetary policy.
As things stand at the moment, the ECB remains convinced that not only the pre-conditions for an early rate hike are not going to be met anytime soon but also the ECB will be willing to reduce risks of premature tightening of financing conditions and fragmentation that would undermine the transmission of past policy accommodation.
Pietro Baffico, European Economist, abrdn
As expected, the total monthly pace of net asset purchases will gradually decline, with PEPP ending on schedule in March next year. At the same time, the reinvestments of maturing securities already purchased under the PEPP has been extended until at least the end of 2024, and can be adjusted flexibly across time, asset classes and jurisdictions, and including Greek bonds. Moreover, the ECB signalled that net pandemic purchases could also be resumed if necessary. Given this enhanced flexibility, it deemed sufficient to have a relatively less generous bridge than expected for the APP, with monthly net purchase at €40 billion in Q2 2022 and €30 billion Q3, and reverting €20 billion from October onwards, for as long as necessary. The commitment is a relatively more hawkish news for markets, but a decision that reflects the inflationary pressure and at the same time keeps options open for the ECB. Indeed, the ECB acknowledged inflationary pressure to be more persistent, and increased its forecast to 2.6% this year, and markedly to 3.2% next year, before receding below its 2% target in the longer term. Notably, the policy sequencing was unchanged. With net purchases to end before any interest rates increase, we expect no hikes in 2022.
Overall, the ECB preferred to allow for more flexibility in the future rather than making larger commitments. This may seem as a relatively hawkish stance for investors, but overall it still implies a long time before a full normalization, in line with our view that ECB remains on the dovish side among the major central banks, shifting its policies only gradually while retaining flexibility.
