The ECB begins to withdraw its arsenal of stimuli for fear of inflation

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The Nordic hawks of the European Central Bank (ECB) score their first victory in the war for the withdrawal of monetary stimulus. The institution directed by Christine Lagarde has decided this Thursday to start reduce the volume of purchase of public debt in its pandemic emergency program (PEPP) starting in the last quarter of the year for fear of inflation. The ECB’s announcement thus anticipates the US Federal Reserve, which also intends to begin dismantling the open bar in the coming months.

“El Governing Council considers that favorable financing conditions can be maintained with a rhythm of net purchases of assets within the framework of the emergency purchase program against the pandemic slightly lower than the previous two quarters“, he points out the statement made public at the end of the meeting.

Although the text does not specify it, analysts predict that the rate of purchase of PEPP debt will slow from the current 80,000 million euros per month to 60,000 million per month and cut back early next year. The program will definitively conclude in March 2022, as planned.

Of course, the ECB keeps interest rates unchanged, which will remain at historical lows: the general rate remains at 0% and the deposit facility for banks continues in negative territory (-0.5%). Lagarde has also confirmed that, although the withdrawal of stimuli begins, rates won’t go up for many months. Specifically, until inflation is around 2% “in a lasting way.” To achieve this goal, the Governing Council is willing to allow “a transitional period in which inflation is moderately above target “.

The ECB’s announcement comes after inflation in the eurozone skyrocketed to 3% in August, its highest level in a decade and above the new target of 2%. Although Lagarde insists that this rise is explained by temporal factors and predicts that inflation will fall again in 2022, Germany and the Nordic countries fear a general rise in prices. In recent days, both Bundesbank Governor Jens Weidmann and his Austrian and Dutch counterparts have started pushing for the stimulus to be withdrawn.

Furthermore, Eurostat has just revised upwards the growth of the euro area in the second quarter to 2.2% (instead of the 2% it initially calculated). This means that the economic recovery is gaining momentum and that the impact of the Delta variant was much lower than expected. The latest data also confirm the increase in employment across the EU and the reduction in the unemployment rate. In this context, the ECB’s arsenal of stimuli becomes less necessary.

The emergency purchase program against the pandemic was launched in March 2020, in the middle of the initial phase of confinement, with a budget of 750,000 million euros. His goal was prevent risk premiums in Italy and Spain from skyrocketing, the two countries hardest hit by Covid, and that the economic debacle triggered a new debt crisis in the eurozone.

Currently, the PEPP’s firepower reaches 1.85 billion euros, since it has been recharged twice: the first in June 2020 (600,000 million extra) and the second in December of that year (500,000 million ). The ECB has thus helped absorb unprecedented debt issues that are being carried out by the eurozone countries to combat the coronavirus crisis.

So far, the issuing institute has already spent 1.34 billion euros, with which it has bought 140,700 million of Spanish debt and 209,000 million of Italian debt.

The next big battle at the ECB between the hawks of the north and the pigeons of the south will focus on its regular debt purchase program (known as APP for its acronym in English). Analysts predict that once the pandemic emergency program ends, the endowment of the APP, which is currently limited to 20,000 million per month, is reinforced.

The debate now is what will be the amount of the reinforcement and, above all, if its mode of operation will be made more flexible. With the APP, the ECB is obliged to buy debt based on the economic weight of each country (and not its needs) and has a limit of 30% of the total issued, which is already bordering on in some cases. Some restrictions that did not apply to the emergency program due to the pandemic and that the southern pigeons want to be abolished. While waiting for this discussion to be resolved, what is clear is that the withdrawal of stimuli from the issuing institute will be very slow.

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