ECB Call: Looking for slower monthly purchases under PEPP
Head of Macro Analysis
Summary: We are onside with consensus in expecting no change to monetary policy at this week's Governing Council. Overall financing conditions appear very easy. This opens the door to slower monthly purchases under the Pandemic Emergency Purchase Programme (PEPP) in Q4, from 80bn EUR per month to 60bn EUR per month - with little market impact. ECB doves, such as Chief economist Philip Lane, are likely to play down the significance of this announcement. We also expect the ECB to revise upward its staff projections given the positive economic momentum in the eurozone this summer.
Stronger growth… : ECB minutes from 21-22 July confirmed there is some optimism in the air : « Risks to the outlook remained broadly balanced [...] the possibility of a faster than expected draw-down of savings represented some upside risks to the outlook ». The spread of the Delta variant is not a major issue from an economic point of view. More than 70% of the adult population in the European Union is now fully vaccinated. This is a major milestone. The re-introduction of restrictions to travel or to go out is highly unlikely this fall, in our view. Given the positive economic momentum, we expect the ECB will revise upwards its macroeconomic projections for this year and next year.
…But upside risks to the inflation outlook : The euro area inflation has increased noticeably this summer. But a majority of Governing Council members will likely dismiss the latest high inflation number as temporary phase, mostly driven by one-off factors. In July, the euro area industrial producer prices rose more than expected at 2.3% versus prior 1.4%. In August, the euro area CPI first estimate climbed to 3.0% versus prior 2.2% - way above ECB’s former inflation target. The increase mostly results from higher commodity prices and transportation costs, but first and first and foremost, from base effects. This is a key factor driving CPI distortion in France, for instance. August French CPI was out at 1.9%. Last year, the summer sales took place in August. This was not the case this year, hence the apparent acceleration in prices of manufacturing products (+1.3%). The recent evolution of prices tends to confirm the ECB’s risk analysis. However, if the increase in energy and intermediate goods continue, there is a real risk that higher producer prices will be passed on to consumers. This would result in lower consumer spending.
A technical adjustment to the PEPP purchases : Overall financing conditions appear very easy. The ECB systemic stress indicator is back to where it was before the outbreak, at 0.03 (see Chart 1). This indicator, initially developed in 2012 in the midst of the euro area sovereign debt crisis, is based on fifteen financial stress measures. This is a good way to assess the overall financing conditions in the euro area. Added to the positive economic momentum in the euro area this summer, this supports the call for a slower pace of asset purchases in Q4. We expect asset purchases to slowdown from €80bn per month to €60bn per month. This would be similar to the volume of January-February 2020. ECB doves, such as Chief economist Philip Lane, are likely to play down the significance of this announcement in order to avoid the market interprets it as a signal of tapering. In our view, the market impact of the technical adjustment to the PEPP purchases will be marginal.
Talks about exit strategy are premature : Looking ahead, we believe ECB hawks will push further in favor of an exit strategy from emergency monetary policy measures. Initially, we expected the debate about the future of the PEPP to happen in December/early next year. But it might happen earlier. Unless the pandemic revives in the coming months, it is unlikely the PEPP will be extended beyond March 2022. Two options are on the table : a transitory accommodative asset purchase programme (which has been mentioned by ECB President Christine Lagarde earlier this summer) or a boost to the monthly volumes in the Asset Purchase Programme (APP). There is no point to try to forecast a rate hike from the ECB given it is very far, far away. From an investor’s perspective, a rate hike basically does not matter.