Economists anticipate slow deceleration in ECB bond buying stimulus

Economists expect the European Central Bank to continue its net asset purchases for another two years – well after other major central banks have started cutting theirs – according to a Financial Times survey.

Three-quarters of the 32 economists polled by the FT said they expected the ECB to stop expanding its bond portfolio by 4.6 billion euros in 2023; only just over a quarter said they thought he would do it before that.

Many central banks around the world have already started to cut their monetary stimulus measures in response to sharp increases in inflation as the global economy rebounds from the shock of the coronavirus pandemic.

The ECB has been slower than most; in December, its president Christine Lagarde said its € 1.85 billion pandemic response program would halt net bond purchases in March, while an older asset purchase program would suffer a reduction “step by step” until at least October. However, she did not specify when net asset purchases would come to a complete stop.

In contrast, the US Federal Reserve said last month it would step up its reduction in bond purchases to end in late March, while the Bank of England said after raising interest rates the month last that its net purchases would cease at the end of the year.

William De Vijlder, chief economist of the French bank BNP Paribas, was among those who predict that the ECB will continue its net purchases of bonds until 2023, with a complete reassessment of the outlook for ECB policy ”.

Inflation in the euro area soared to 4.9% in November, a record since the launch of the single currency more than two decades ago, driven by soaring energy prices, resurgent demand and supply chain bottlenecks.

Last year, the ECB agreed to a new strategy, pledging not to raise its deposit rate from the current low of minus 0.5% until it was convinced that inflation would hit its peak. target of 2% over the next two years and would stay there for an additional year. It also requires that core inflation, excluding energy and food prices, be “sufficiently advanced” to meet its target. He said asset purchases would stop shortly before raising rates.

More than half of economists polled by the FT said they expected the ECB to start raising its deposit rate by 2023. More than a quarter believed it would not do so until 2024.

Lena Komileva, chief economist at G + Economics, predicted that the ECB would stop buying bonds this year and hike rates by the end of 2023. Like several others, she warned of the risk of tightening the monetary policy too early – something the ECB was criticized for doing in 2011 when it hiked rates twice on the eve of the eurozone sovereign debt crisis.

“As the effects of each new pandemic wave on growth wear off and inflation likely peaked in late 2021, a political rush to withdraw fiscal and monetary support to private sector capital – industry, banking and business – in an ongoing pandemic is by far the greatest risk to the outlook, ”she said.

Almost four-fifths of economists predicted that the ECB would tighten policy this summer by making the rate less attractive on soft loans it gives to banks, known as longer-term targeted refinancing operations. These 2.2 billion euros in loans at rates as low as minus 1% provide banks with an easy source of profit by actually paying them to borrow money.

Economists were also divided on whether the EU’s new € 800 billion stimulus fund significantly reduced the chances of a eurozone bond market liquidation. The fund provides grants and loans from Brussels to member states to support their economic recovery in return for structural reforms.

“Peripheral spread levels are tight and volatility could increase as the ECB reduces its purchases,” said Alberto Gallo, portfolio manager at Algebris Investments, referring to the spread between the cost of borrowing of the weaker European periphery like Italy and those of more countries like Germany.

“In particular, we could see volatility around the French elections and potentially around the Italian elections,” he warned.

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