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The European Central Bank will expand its regular monthly bond buying for half a year to smooth the exit from pandemic stimulus, which officials will also revamp to combat future market turmoil.
Officials in Frankfurt confirmed their 1.85 trillion-euro ($2.1 trillion) emergency measure, known as PEPP, will wind down as planned in March. To cushion that halt in purchases, they temporarily boosted their older bond-buying tool.
The so-called Asset Purchase Program will double to 40 billion euros a month, starting in the second quarter. Policy makers will then taper to 30 billion euros in the following three-month period, before returning to the existing pace of 20 billion euros in October.
ECB officials also changed the reinvestment rules around PEPP, making it it easier to deploy support in the event of market jitters. Greece, which is excluded from regular bond purchases because of its low credit rating, may receive extra support under the plan.
Policy makers can also reactivate the tool if needed to combat the sort of crisis whose eruption in the euro zone last year forced them to create it in the first place.
“In the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time,” the ECB said in a statement. “Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.”
Italian bonds led declines in the region, lifting the 10-year yield eight basis points to 1% and widening the premium over bunds by four basis points to 131. German yields also climbed led by the long-end where 30-year rates rose above 0% for the first time since November. Money markets kept bets on a first 10-basis-point rate hike by end of next year.
The decision is an acknowledgment that emergency policy settings must come to an end in the face of the euro area’s fastest inflation since the single currency was created and as economic output nears pre-crisis levels.
But the move also takes into account the heightened uncertainty triggered by the resurgent pandemic, which is already weighing on the continent’s recovery and has halted economic growth in Germany.
The ECB’s announcement follows Wednesday’s decision by the U.S. Federal Reserve to double the pace at which it tapers its own stimulus as it grapples with the biggest surge in consumer prices in three decades. The Bank of England was even more proactive on Thursday, unexpectedly becoming the first Group of Seven central bank to raise interest rates since the pandemic struck.
Unlike the Fed, the ECB hasn’t so far abandoned its insistence that elevated price gains are transitory — driven by supply jams and soaring energy costs that will fade in 2022. Backing that view, IHS Markit said German inflation “might have peaked” as its latest gauge of activity showed Europe’s biggest economy stagnating in December.
“The progress on economic recovery and towards its medium-term inflation target permits a step-by-step reduction in the pace of its asset purchases over the coming quarters,” the ECB said. “But monetary accommodation is still needed for inflation to stabilize at the 2% inflation target over the medium term.”
President Christine Lagarde will elaborate on the ECB’s decisions at a press conference at 2:30 p.m. in Frankfurt. The fresh macroeconomic projections she’ll be armed with will show consumer-price growth back below the central bank’s 2% target in 2023 and 2024, according to people familiar with the matter.
That leaves the prospect of a hike in borrowing costs still some way off, with the benchmark deposit rate staying at -0.5%.
(Updates with Greece in fourth paragraph)
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