Published on Monday, September 13, 2021

Europe | The ECB delays its key decisions until December

No surprises came out of last Thursday's ECB meeting, with the expected announcement of a reduction in asset buybacks under its pandemic emergency purchase program (PEPP). The big decisions on monetary policy measures will have to wait until its meets on December 16.

Key points

  • Key points:
  • The Governing Council unanimously decided to cut back on PEPP purchases in the fourth quarter of this year — from the EUR 80 billion a month it spent in the previous two.
  • Lagarde made it clear that this is not tapering (a gradual removal of stimulus measures)—fearful of what happened in 2013 when the ending of the Fed's stimulus package triggered a strong reaction in the markets—just a recalibration of current bond buybacks.
  • The ECB forecasts headline inflation at 2.2% in 2021, but subsequently coming in well below target at 1.7% in 2022 and 1.5% in 2023.
  • Looking forward, it seems logical that, once the PEPP ends, there will be some form of transition or "bridging program" between it and the asset purchase program (APP) to avoid an abrupt stop to buybacks — possibly paid for out of surplus PEPP funds.
  • It seems less likely that the ECB will extend the APP or increase its flexibility, as it would have to exceed the self-imposed limits on the amount of domestic bonds from each country it can buy.

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