The European Central Bank It will seek to soften the withdrawal of emergency bond purchases next year before a stronger inflation outlook allows for an end to all quantitative easing in 2023, according to economists surveyed by Bloomberg.
Political authorities will decide on Thursday to halt net purchases under their 1.85 trillion euros ($ 2.1 trillion) pandemic plan in March, the survey shows, and a temporary boost to the pace of their regular schedule is expected to mitigate the impact. . Just under half of those surveyed expect the first interest rate increase in more than a decade the following year.
The responses give an idea of how the ECB could withdraw from its ultra-flexible policy after inflation soared to almost 5%, the highest since the start of the euro. While President Christine Lagarde sees the trend as transitory – unlike Federal Reserve Chairman Jerome Powell – it is still unclear how quickly the rate will fall below the ECB’s 2% target.
For the ECB, the time to decide the future path of the stimulus is at its Governing Council meeting on December 16. However, a new peak of COVID-19 in the region and the appearance of the omicron variant tarnish the panorama.
“The ECB will have to acknowledge that the current high inflation and short-term upside risks justify removing some of the ECB’s emergency policy support,” said Oliver Rakau, an economist at Oxford Economics. “But equally, the soft-toned core of the Council will want to avoid a premature adjustment.”
Purchases under the pandemic plan should decline to 50 billion euros a month in February, economists said. The ECB bought € 68 billion in both November and October.
Respondents expect regular bond purchases, which currently cost € 20 billion a month, to double in the second quarter and gradually return to its current volume in October. A gradual three-month reduction towards zero should begin in July 2023.
A key concern for policymakers is whether the ECB should retain some of the flexibility of its tools during the pandemic to respond to any disruption in eurozone bond markets beyond March. Some have suggested that the emergency program may continue to play a role.
Authorities with knowledge of the matter have said that the ECB could extend the period in which it refinances maturing securities and apply more flexibility to the geographical allocation of such purchases.
Most economists surveyed anticipate that the ECB will use reinvestments strategically to address potential market fragmentation. More than 40% said the central bank could restart the program if necessary, and about a fifth expected a new plan.
The increase in coronavirus cases throughout the region causes new blockades and restrictions, which is why the pandemic re-emerged as the biggest concern for those surveyed. In contrast, concerns about supply chain issues that have hampered manufacturers waned.
Economists said the ECB’s inflation forecasts will be raised even as prospects for economic growth next year are expected to dim. In September, the ECB forecast a slowdown in inflation to 1.7% in 2022 and 1.5% the following year.
The latest round of projections will include the first estimates for 2024.
Most respondents do not expect the central bank to announce a new round of long-term loans to banks. That’s in line with recent comments from policymakers – including Executive Committee member Isabel Schnabel – who say an extension of the program does not have to be decided next week.
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