ECB Holds On Rates, Lagarde Says 2022 Hike ‘Very Unlikely’, Bank Announces End of Pandemic-era Asset Buys

- Reduced pandemic asset purchases in Q1

- Reinvestment of pandemic buys extended to end of 2024

- APP asset purchases to double in Q2

- 2022 inflation seen at 3.2%, nearly twice last forecast

- Monpol flexibility considered paramount



By Eric Culp

European Editor, LiveSquawk News



16 December 2021 | 16:05 GMT



FRANKFURT – The European Central Bank shuffled in the direction of hawkish monetary policy Thursday by announcing plans for a first-quarter taper of its emergency pandemic asset purchase programme before it ends the scheme in March.


The bank failed to define how much it will ease the buys next quarter, but the taper is to be followed by an extra EUR20bn in monthly purchases staring in April via another scheme, the Asset Purchase Programme, or APP, which has been running for the majority of the past seven years.


“We did not want a transition that hurt,” ECB President Christine Lagarde said.


The QE plans, even if they are at a reduced rate, were announced despite major upward revisions in the ECB’s inflation projections. The bank said consumer price growth next year is expected to surge to 3.2%, nearly double its September estimate of 1.7% and well above the bank’s target of 2% over the medium term. Next year’s inflation rate excluding food and energy was forecast at 1.9%, a half a percentage point above the September estimate.


A preliminary reading for Eurozone inflation hit a record 4.9% last month.


Thursday’s announcements had a flavour of Dickens’ Tiny Tim wishing hawks and doves alike “A Merry Christmas to us all.” Frederik Ducrozet, senior European economist at Pictet Wealth Management, tweeted: “There's a bit of everything for everyone. That the APP remains open-ended is a surprise, and a huge victory for the doves.”


Further dove fodder came from the ECB President Christine Lagarde’s statement that “under the present circumstances, as I have said before, it is very unlikely that we will raise interest rates in 2022.” She did note that the bank has to be “very attentive” to data and remains ready to adjust monetary policy accordingly.


Maintaining rates at their current level left the ECB lagging well behind central banks in the US and the UK, which Lagarde said made sense as those countries are in different position of the economic cycle. In the US, where headline inflation is at a 40-year high, the Fed said Wednesday that it would end its pandemic bond purchases in March, with officials there seeing as many as three rate hikes in the coming year. After UK inflation rose to its highest level in a decade last month, the Bank of England surprised markets Thursday with at 15 basis-point hike that raised its benchmark rate to 0.25%. Earlier in the day, Norway increased its main rate 25 basis points to 0.5%.


The latest ECB monetary policy adjustments clearly ruffled some feathers at the bank’s Frankfurt HQ. Lagarde said that while a broad majority of the governing council supported the changes, a few members did not.


Long forward guidance horizon

Analysts said they were surprised that the bank offered QE guidance for all of next year, with the initial second-quarter doubling of the monthly APP purchase rate to EUR40bn set to fall to EUR30bn in the third quarter before reverting back to its current level of EUR20bn in the last three months of the year.


Observers warned of about the danger of policy backtrack due to any unexpected shifts in the economic environment. ING’s Carsten Brzeski tweeted, “For everyone trying to convincingly predict what the ECB will do in one or two years from now: the fact that core inflation forecasts went up by 0.5pp and 0.2pp within three months suggests that changes can come faster than one would expect.


“Take any ECB forward guidance with a huge pinch of salt.”


Considering the possibilities of swift turns in the economy, the central bank hedged its cancellation of the emergency pandemic scheme, noting: “Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.”


The bank specifically mentioned Greece as a possible candidate for further asset buys. “This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it is still recovering from the fallout of the pandemic.”


For monetary policy, the bank’s new watchword is “flexibility”, a term Lagarde mentioned repeatedly in remarks to journalists on Thursday. In other words, the bank plans to do whatever it sees fit, forward guidance be damned. While some might be concerned that such a stance could wrongfoot investors, others likely see sagacity in keeping all options available, especially in a superfluid environment filled with myriad stimuli, which include the pandemic, rampant inflation, and a clunky supply chain.


Economic and price growth on the up and up

Lagarde said the outlook for business activity in the euro-area is “broadly balanced”, with threats remaining from an aggravation of the pandemic. She noted that while supply bottlenecks could last “for some time”, she said are likely to wane next year.


Inflation is also expected to pass its apex in 2022, she predicted, but it is set to remain above the bank’s goal of 2% for most of the year.


“We are really making progress toward target,” Lagarde said, warning that inflation risks are currently to the upside.

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