FRANKFURT, Germany â€” The European Central Bank took baby steps toward ending its extraordinary pandemic stimulus program on Thursday, but youâ€™ll have to wait until December to find out how serious it is.
Emboldened by the eurozoneâ€™s stronger-than-expected rebound from the winter wave of the pandemic, the ECB said it would reduce the pace of its bond-buying â€œmoderatelyâ€ for the next three months. It didn’t name a figure, but media reports suggested the new target will be between â‚¬60 billion and â‚¬70 billion, down from a rough average of â‚¬80 billion a month through the spring and summer.
In a welcome â€” and rare â€” sign of harmony, ECB President Christine Lagarde noted that the decision had been unanimous across the bankâ€™s Governing Council. But the bank, and the analysts who follow it, warned against reading too much into a step that, in essence, only reverses the decision it took in March to ramp up the stimulus.Â
Lagarde herself was adamant that the move does not mark the start of a major policy change.Â
â€œThe ladyâ€™s not tapering,â€ she said, with a nod to the late Margaret Thatcher (who, having refused to grant the Bank of England independence in her 11 years as prime minister, might have nodded back approvingly at the ECBâ€™s continued submission to the borrowing needs of governments).
â€œWith its unanimous minor decision today, the ECB postponed the big decisions about a genuine shift in its stance to its December meeting,â€ said Holger Schmieding, chief economist at Berenberg Bank, in a note to clients.Â
Those bigger decisions include whether to end the â‚¬1.85 trillion Pandemic Emergency Purchase Program as scheduled in March, and how to carry on running bond purchases under its separate, more strictly defined Asset Purchase Program thereafter. In other words, whether to stick to the view that the liquidity fire hose of the last 18 months is indeed a time-limited emergency measure, or whether it is to be adopted as the bankâ€™s everyday reality indefinitely.Â Â
Those decisions will require a more robust analysis of the nature of the price shocks that are roiling the world economy after 18 months of unprecedented stimulus. Producer price inflation is running at over 12 percent in the eurozone and at 9.5 percent in China, the workshop of the world. Prices for base metals have hit 13-year highs this week, while nothing in the short term can ease the semiconductor shortage that is disrupting production of everything from automobiles to smartphones.
Eyes on the Fed
At her press conference, Lagarde stuck doggedly to the opinion that final consumer price inflation â€” which hit a 10-year high of 3 percent in August â€” is still largely temporary and will return to trend once one-off factors, like last yearâ€™s collapse in energy prices, pass out of the calculations.
In a change of tone from previous press conferences, Lagarde acknowledged that the rise in prices felt by people across the region was indeed reality, rather than a statistical anomaly. Even so, she added, â€œunderlying price pressures are building up only slowly,â€ arguing that the bank doesnâ€™t expect the autumn round of collective wage negotiations to drive any kind of wage-price spiral.Â
The bankâ€™s new forecasts, also published on Thursday, may have been revised up to expect inflation of 2.2 percent this year, but still see it falling back to 1.7 percent next year, and 1.5 percent in 2023 â€” only a fraction more than the 1.4 percent expected in June and well short of the 2 percent target it’s now explicitly gunning for.Â
And even though Lagarde said eurozone GDP would reach its 2019 level by the end of this year, that still leaves it well short of the trend it was on before the pandemic erupted.
â€œThe minor change to [the inflation forecast for] 2023 signals that the ECB expects to keep rates on hold for years to come, probably into 2025,â€ said Berenbergâ€™s Schmieding.
By December, it ought to be clearer whether such signaling is appropriate. By that time, the U.S. Federal Reserve will likely have begun reducing its own bond purchases, putting upward pressure on U.S. bond yields. Typically, rising U.S. long-term rates push European ones higher with them â€” jeopardizing the “favorable financing conditions” that are the guiding light of ECB policy right now.Â
The ECB was able to keep financing conditions easy in the spring by printing money more quickly. Without some improvement on the inflation front, that might be an altogether harder trick to pull off in December.
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