ECB ends pandemic-era bond purchases, prepares smooth transition

FRANKFURT — The European Central Bank will end net asset purchases under its pandemic crisis program by the end of March and boost monthly purchases under its older program to smooth the policy wind-down, it announced Thursday.

At the same time, the ECB stressed the need to keep a certain degree of policy flexibility intact. That means leaving the door open for resuming the program if needed and refraining from setting an end date to all asset purchases.

Since the ECB has made an end of net asset purchases a precondition for raising interest rates, today’s decision is a stark contrast to the Bank of England, which raised interest rates earlier in the day, and to the U.S. Federal Reserve, which on Wednesday said it would end all asset purchases by March while signaling three interest rate hikes next year.

The ECB’s announcement on its pandemic emergency purchase program (or PEPP) came as expected. It confirmed it’ll slow asset purchases starting in the first quarter, and ending net purchases as planned by end-March 2022. At the same time, policymakers agreed to extend the reinvestment of expiring PEPP bonds until end 2024.  

Policymakers also agreed to retain flexibility enjoyed under the PEPP “within our mandate” during this reinvestment phase.

“In particular, in the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time,” the ECB said. “Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.”

To smooth the transition, the ECB will boost net purchases under the earlier asset purchase program (APP) from €20 billion to €40 billion in the second quarter before going back down to €30 billion in the third quarter. From October 2022 onward, the Governing Council will maintain net APP purchases at a monthly pace of €20 billion “for as long as necessary to reinforce the accommodative impact of its policy rate.”

On the overall dovish statement, policymakers gave one nod to risks of rising inflationary pressures, noting explicitly that the ECB stands ready to change policy in “either direction” should conditions require.