The ECB holds rates steady but cuts Pepp purchases from March 2022

On the day in which the Bank of England – first among the big central banks – announces a 15-point hike in its reference rate (which thus rises to 0.25%), the European Central Bank confirms its willingness to keep its rates steady (and an increase in 2022 – explained president Christine Lagarde – “remains very unlikely”) but continues with the ‘cancellation’ of the Pepp pandemic buying program with interventions that will be reduced in the first quarter of 2022 and then cease altogether in the end in March 2022. At the same time, Eurotower strengthens the ‘normal’ purchasing program (App) bringing it to 40 billion per month in the second quarter of 2022, with a progressive decline to 30 billion euros in the third quarter and 20 billion euros from October in then “for as long as necessary to reinforce the accommodative impact of its official rates”. Purchases that – it should be remembered – “will end shortly before” the rise in interest rates.

But Pepp does not ‘die’ entirely, given that the Governing Council has chosen to extend “at least to the end of 2024” the time horizon for the reinvestment of maturing securities while for App purchases the maturing securities will be reinvested in full “for a long period of time beyond the start date of the rate hike and, in any case, as long as necessary to maintain favorable liquidity conditions and a large degree of monetary accommodation “.

In short, the ECB keeps its hands free (in case of need, it is explained, the Pepp could be reactivated) also because “the pandemic has shown that, in conditions of stress, the flexibility in planning and conducting purchases” has favored the transmission of monetary policy “and made efforts to achieve” the goals set by the Governing Council more effective. A flexibility that – all things being equal “will remain an element of monetary policy” and which could lead to including Greek government bonds in the reinvestment choices of Pepp bonds, to avoid negative repercussions while the Greek economy “is still recovering from the fallout of the pandemic “.

Explaining to the press the latest decisions of 2021, Lagarde stressed that “the recovery of the Eurozone continues, and after slower growth in the fourth quarter we expect a strong rebound next year”. A scenario that is reflected in the new macroeconomic estimates of the ECB which forecast a Eurozone GDP at + 5.1% in 2021 and 4.2% next year. For 2023, growth is expected at 2.9% and 1.6% in 2024: estimates that see – compared to those of September – a cut in the growth expected next year and an increase for 2023.

But inflation is also growing, which due to the “significant” increase in energy prices and shortages – of materials and labor – recorded in various sectors “will remain high in the short term but will diminish” in the course of 2022. Overall, the ECB believes that inflation “will remain below 2% in its projection horizon”, as confirmed by the new data that see prices rise at 2.6% for 2021 and then reach a peak in 2022 at 3.6% , followed by a decline in the following two years with inflation at 1.8%. Excluding food and energy prices, inflation is estimated at 1.4% this year, 1.9% in 2022, and then falls to 1.7% in 2023 and 1.8%. the following year.

In short, the ECB continues (but not unanimously, given that “some members did not agree” with the decisions adopted on some measures) without major jolts for a path already outlined even if in a scenario of “strong uncertainties”: certainly, Lagarde acknowledged, after the initial shock the Eurozone countries had to learn to live with the pandemic and the result is that “our economies have become stronger and more resilient” to the spread of new variants. Like Omicron which “could affect demand, due to the new restrictions’ but also on supply”.