ECB Insight: Net Asset Purchases Likelier to End in June, With Early July Probably Option Two

9 May 2022

By David Barwick – FRANKFURT (Econostream) – We wrote yesterday that we consider a June end to the European Central Bank’s net asset purchases probable, without ruling out the beginning of July. In the interim, we have grown more confident that these are in fact the choices, and prefer the former.

To be sure, ECB President Christine Lagarde on Saturday yet again expressed the expectation that ‘net asset purchases should be concluded early in the third quarter’, a timing that, strictly speaking, would be inconsistent with ending purchases in June.

On the other hand, a June ending, which Econostream said as early as March 11 was not excluded, has attracted growing support, with Executive Board member Isabel Schnabel, Banca d’Italia Governor Ignazio Visco and Banque de France Governor François Villeroy de Galhau all recently expressing a preference for this scenario.

Previously, we sought to reconcile apparently disparate positions in this regard by suggesting that the ECB, never shy about bending the English language to suit its purposes, merely needed to define the point in time at which net asset purchases can be said to end as that period in which these purchases reach and remain at zero. That way, if the final purchases are made in June, July could be declared the end.

We are now disposed to the view that it doesn’t much matter. Put simply, the ECB can always change its mind and is unlikely to feel constrained to conduct net asset purchases beyond June 30 just by virtue of having previously spoken of a 3Q ending.

This is all the more so given that an end to net asset purchases in 3Q would be early in the quarter anyway. Indeed, Econostream understands that ‘early’ can be very early, so that the difference between the early 3Q scenario and an end in June could theoretically amount to the one day separating the last day of June from the first day of July.

Therefore, the ECB can say ‘early in the third quarter’ now and at the same time can end net purchases in June.

Although we do not dismiss the possibility of extending purchases into early July, we don’t see much advantage to this. We happened to ask an insider last month whether the ECB was behind the curve, and it is reasonably clear based on policymakers’ public remarks that this person is not alone in feeling that the ECB is indeed behind the curve in terms of asset purchases, but maybe not in terms of hiking rates.

By that reasoning, going into July doesn’t seem to make much sense. Moreover, any July purchases would likely be too small to be of much practical importance, and we don’t see the need for the symbolism. On the contrary, symbolism at this point would best communicate seriousness about fighting inflation, not about buying yet more assets, and the ECB knows this.

Not to be overlooked in all of this is the fact that, as Econostream also understands, views among Governing Council members have converged a great deal lately. This is the perception within the Eurotower, but it is also apparent externally. In the context of net asset purchases, it is clear that no one expects these to end in May, but neither is anyone pushing for a post-3Q ending date.

Even Visco, a super-dove, spoke of ‘June’, and Executive Board member Fabio Panetta, no less dovish, said last week that ‘net asset purchases may no longer be necessary’ and that not much hinged on whether the precise timing of major decisions was ‘two or three months earlier or later.’

This recent convergence in the direction of ending asset purchases earlier is also consistent with the previous decision to decelerate the buying more quickly and the failure of inflation since then to subside.

Should the ECB not want to start hiking rates in July, even this would be no more than a condition under which the ECB could continue to buy assets, if it wished to. That is, it wouldn’t be an actual reason to extend net asset purchases beyond June. It strains the imagination a bit to think the ECB at this point would defer lift-off beyond July just to be able to expand its balance sheet yet further.

For all these reasons, we at Econostream think that if data remain consistent with recent developments, then the ECB’s main choices for ending net asset purchases are the end of June and early July. It doesn’t matter much either way (both leave the path to a July rates lift-off clear), but the justification for the latter option is less obvious.

None of this has been decided at the level of the Governing Council (or the Executive Board, for that matter). Rather, it remains a subject for discussion as of this moment, with incoming information including updated forecasts a key element.