Exclusive: Econostream Understands September ECB Meeting Outcome Could Be More Wait-And-See

16 August 2021

- ECB to set Q4 PEPP pace, but major announcements on future of QE less likely
- Council can start discussions, but these to continue in the autumn
- Major decisions in September would be seen as rushing things unnecessarily
- August holidays leave little time to lay groundwork; uncertainty still elevated
- Neither cliff effects nor new forecasts seen forcing major decisions in September

By David Barwick – FRANKFURT (Econostream) – On the face of it, with the European Central Bank’s strategy review at an end and the outcome partly incorporated in the ECB’s policy stance, the September 9 meeting of the Governing Council packs the potential to be a date from which important decisions could emerge about the future of asset purchases.

That view would probably be misguided, however. Based on dialogue with people close to the decision-making process, Econostream understands that observers may be well advised not to get too far ahead of themselves in terms of what next month’s monetary policy meeting could yield.

For starters, they may wish to keep in mind ECB President Christine Lagarde’s repeated insistence, last uttered on July 22, that ‘anything like that’ - referring to a discussion of the PEPP’s future - ‘would be totally premature.’ Vice President Luis de Guindos a week later echoed this, saying, ‘We still have time to decide about the future of PEPP.’

Going from ‘totally premature’ at the end of July to a comprehensive decision at the beginning of September, especially considering the nature of August in Europe, would seem inconsistent.

And indeed, Banque de France Governor François Villeroy de Galhau was notably less explicit on the subject of timing, saying merely that ‘[w]e will see about the purchasing programmes in the autumn’ and observing that ‘we still have three monetary policy councils until the end of the year. That leaves time to look at things.’

To be sure, the September meeting will feature updated staff macroeconomic forecasts. There is a non-negligeable chance that the all-important 2023 inflation forecast, now at 1.4%, will undergo at least marginal upward revision.

But at most, the new forecasts may only be part of the so-called joint assessment of financing conditions and the inflation outlook used to set the proper pace of PEPP asset purchases since the ECB declared financing conditions to be its guiding light last December.

True, as Lagarde observed in April, the Governing Council can instead conduct that assessment ‘on an intermediate basis as opposed to the comprehensive assessment that we conduct at the time of the projections.’ But de Guindos already said that the Council would ‘set the pace of the [PEPP] purchases for the fourth quarter’ in September, which makes sense given the subsequent meeting will only be at the end of October and thus already a third of the way into the fourth quarter.

But the quarterly PEPP purchase pace, assuming little change from the current level so as to avoid any unwanted signalling, is not one of the larger issues looming, decisions about which are unlikely to be forced by possible revisions in September to staff macroeconomic projections.

In particular, cliff effects - which the Governing Council is united in its desire to avoid – would eventually require that authorities indicate more fundamentally what is to be done about asset purchases, but do not demand a decision quite yet. As waiting until December would however be seen as cutting it somewhat close, October in this respect is a natural compromise.

The mere fact that the ECB can keep a steady hand in September does not by itself imply a wish to do so. However, there are reasons to think the Council will want to wait. In this context, it is particularly worth remembering why the ECB in July changed forward guidance with respect only to interest rates and not asset purchases, an approach Holzmann attributed to ‘simply too much uncertainty in the middle of the summer’.

Despite the ongoing economic rebound and the lifting of restrictions in many jurisdictions, uncertainty has not diminished since then. On the contrary: the Delta variant of the coronavirus has led to the reintroduction of some containment measures and more generally reinforced the concern that the sky is not cloudless, the pandemic not past.

Then there is the prosaic fact that August is a holiday month for most of the Eurozone, and monetary policymakers are entitled to a period of rest along with everybody else. The five business days left between the return to work on September 1 and the start of the Governing Council meeting on September 8 afford scant opportunity for a profound study of interim economic developments and complex policy options.

Understandably, not all Council members feel comfortable rushing things under such circumstances in the absence of a pressing need to do so. This reluctance must also be viewed in the context of the ECB’s abiding fear of making a misstep by tightening prematurely.

Admittedly, following the conclusion of the strategy review and the corresponding revision of forward guidance on interest rates, some Governing Council members' comments have supported the expectation that September could conceivably bring important announcements.

Speaking on background, one confirmed to Econostream that it was understood at the July 22 gathering of the Council that there would be discussions on September 9 ‘about the future’ of the APP and that the meeting would be ‘important in this respect’.

Similarly, Austrian National Bank Governor Robert Holzmann said late last month in a CNBC interview that ‘[f]or September, we have foreseen a discussion of all the elements … besides the rates, which is TLTRO, which is the PEPP, which is also APP, the asset purchasing programme which was always there, in order to find out whether we keep it as it is or we change it.’

But discussions can go more than one round, and Holzmann left the outcome open, saying that both a change as well as a lack thereof were ‘possible, depending on the inflation developments, depending on the output gap developments, and depending also on the other elements which are taken into account in our decision.’

Econostream’s impression is that Holzmann’s peers expect no change. The discussion, it would seem, would be an important and natural preliminary to a step that in September it would still be too early to actually take. Indeed, the prevailing sentiment was that the discussion would ideally take some time, as the ECB should retain its flexibility for the moment and not tie its hands by announcing a course of action before necessary.

With almost four weeks still to go to the policy meeting, much can happen. Although the risk does not seem high, key policymakers may yet reach the conclusion that September is the right time for a big step.

As of today, however, Econostream would expect the Council to hold initial discussions on the future of asset purchases in September, and, in line with comments from de Guindos, to ‘set the pace of the [PEPP] purchases for the fourth quarter’, probably at a level that does not leave observers surprised.

Beyond that, the likeliest scenario is that no major announcements signalling a change of course will result and that all signs will wind up pointing to October 28 – if not later.