Exclusive: ECB’s Net Asset Purchases Most Likely to End in July, Official Says
7 April 2022
By David Barwick – FRANKFURT (Econostream) – Though not yet a foregone conclusion, net asset purchases under the European Central Bank’s asset purchase programme (APP) are probably on track to come to an end in the first month of 3Q, Econostream understands.
A wide range of ECB officials have indicated the desire to end such purchases in 3Q, or at least the expectation that this would occur, in line with the Governing Council’s decision of March 10. Following through assumes that – in the words of Chief Economist Philip Lane last week – ‘incoming data support the expectation that the medium-term inflation outlook will not weaken even after the end of our net asset purchases’.
What has been less clear is which month of 3Q would be the last. As Econostream reported the day after the last monetary policy meeting of the Governing Council, any month of 3Q could see net purchases go to zero, technically implying the potential for these to be terminated at the end of 2Q if July were the first month of zero purchases.
Another ECB insider confirmed to Econostream that such an outcome is still not excluded, but that ‘we will probably do something in July as well’ and thus make August the first month of zero net purchases.
Extrapolating the current path – according to which monthly net purchases under the APP are seen at €40 billion in April, €30 billion in May and €20 billion in June – also suggests that July would not yet see the ECB hit zero, he said.
But extending net purchases beyond July would probably only make sense if the answer to ‘the major question here’, namely ‘whether you want to have a hike already in September’, were seen as negative, he said. ‘This optionality is left open at the moment.’
A decision could come as early as the Council’s monetary policy meeting next week, but June, when new staff forecasts are due, may be more appropriate, he said. ‘This is very data-dependent, if we want to be more aggressive or faster with our reactions’, he said. The big issue is ‘what’s our view on inflation a year or two ahead.’
‘If we start to see higher inflation pressures in 2023, 2024, then it’s clear that we may need to shift the hiking earlier’, he said. ‘Earlier’ for this person meant September, with December being the default date of euro area lift-off.
The ECB still ‘would like to really see that the inflation is going to be persistent’, meaning it ‘would like to see that the wages and other indicators are supporting inflation staying at 2%.’
Indeed, in terms of taking a more aggressive tack, ‘the last straw would be if statistics show that inflation has reached wages’, he said. ‘That is the missing link at the moment. Not exactly how high the inflation rate is, but whether it has actually turned into higher wage growth.’
‘My personal opinion is that we probably clearly have a risk of overshooting also in the coming years, and that’s something I think is also on the minds of some governors at least, that there is clearly already a risk of overshooting’, he added.
This person played down the significance of Russia’s war against Ukraine, reminding of the ECB’s single mandate to preserve price stability. ‘If, despite the fact that you have war and lower growth, you still have inflation pressures piling up, then of course you need to react’, he said. ‘My own view is that we maybe start to fall behind the curve if we don’t do it.’
Some Council members may argue that ‘the shock will at the same time dampen growth so much that inflation expectations won’t change that much, leaving us in a better position to claim that this is a transitory phenomenon’, he said. ‘But the risks are extremely high and uncertainty is extremely high, and that’s why so many Governing Council members are talking about optionality.’