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Livesquawk - ECB Likely To Stay On Hold, Avoid Taper Talk
ECB Likely To Stay On Hold, Avoid Taper Talk

- No changes expected for interest rates

- New forecasts set to show higher inflation expectations

- Asset purchases could revert to “normal” emergency levels

- Rate decision set for Thursday at 11:45 GMT

- Q&A with ECB President Lagarde slated for 12:30 GMT

 

By Eric Culp

European Editor, LiveSquawk News

@EricCulpLS

 

8 June April 2021 | 14:00 GMT

 

The only thing “normal” about this year is that the word is part of another word which sums up the current situation: abnormal.

 

This condition also rings true for Europe’s monetary policy and those who make it. A case in point is the unprecedented EUR 1.85 tln Pandemic Emergency Purchase Programme (PEPP), which keeps chugging along. “Normally,” this is the time of year for European Central Bank officials and staffers to start counting clean socks ahead of their annual sojourn to Sintra, Portugal later this month for the lender’s retreat-cum-banking forum, an event that in the past has spawned some pretty market-shaking commentary from ECB presidents. 

 

But not this year. The Sintra event – normally scheduled in mid-June – is to be held as a virtual conference in September, and central bank watchers may have to wait at least that long for the ECB to begin talking about shifting its policy gears.

 

Few central bank mavens expect the ECB to make waves this week. The European recovery has been fitful at best, inflation in the single-currency area is now hotter than a two-dollar pistol, and the sluggish vaccination programmes on the Continent mean that some countries are still restricting commerce. The budding rebound following the first quarter drop in GDP is combining with surging consumer prices to leave policymakers little wiggle room, so there will likely be little, if any, wiggling on Thursday.

 

Taper, schmaper

Some analysts have suggested the rate-setters might already be willing to hint at their plans for tapering asset purchases. This seems unlikely because across the Atlantic, in a country significantly farther up the rebound curve than Europe, the Fed has refused to say that its members have even started talking about eventually discussing cutting purchases of financial assets. And headline inflation there is double the rate in the Eurozone.

 

Also, policymakers at ECB headquarters in Frankfurt surely don’t want to jinx the upturn. Or as ING’s Carsten Brzeski notes, “Even if economic developments would in our view clearly justify at least having a first tapering discussion, the sheer mention of such a discussion could push up bond yields further and consequently undermine the economic recovery before it has actually started.”

 

Brzeski said recent dovish comments from bank officials support this theory. “Last week, ECB executive board member Isabel Schnabel, who currently for us gives the most informative speeches and interviews for those searching for the ECB’s reaction function, set the scene by warning against ‘a premature withdrawal of either fiscal or monetary support’. However, the ECB will not be able to avoid the tapering discussion for long.”

 

But they will likely avoid it this week, at least in public,

 

However, the bank could decide to ditch an extra emergency measure instituted following rate decision discussions in the final month of the first quarter, Brzeski suggested. “The key sentence in March was ‘the Governing Council expects purchases under the PEPP over the current quarter to continue to be conducted at a significantly higher pace than during the first months of the year.’” (The bank reiterated this stance in April.) “We would expect the ECB to drop the ‘significantly higher pace’ and replace it with something like ‘the Governing Council expects purchases under the PEPP to ensure current favourable financing conditions’. Any additional changes to the communication would be a surprise and would signal either a growing willingness for, or opposition to, taper talk after the summer.”

 

ECB inflation forecasts from March could see an upward adjustment.

Forecasts, euro strength on minds of policymakers

This week, the ECB is scheduled to announce its latest economic forecasts alongside its rate decision. Economists expect the growth outlook to be little changed as the inflation projection increases, more reason to do nothing this month. Preliminary data for last May showed that headline Eurozone inflation rose to 2%, which was above the ECB target of at or below that mark and the highest annual consumer price growth in the region since late 2018. And Schnabel has warned that inflation could exceed 3%.

 

Nomura said, “We expect the ECB to revise its 2021 inflation forecast substantially to the upside, but to show a medium-term inflation forecast still well below target. That, together with rising sovereign bond yields, should be enough to keep the ECB’s commentary at this meeting fairly dovish.”

 

Since the last meeting on 22 April, the euro has been up to 2.5 cents higher against the dollar and closed Friday a cent higher since then. “We expect the ECB to show some concern about the recent appreciation in the euro, albeit with no intention to act on it,” Nomura noted. “While the central bank has made clear in the past that it does not target the exchange rate, its impact on the inflation outlook has always been very closely monitored by the ECB.”