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Livesquawk - ECB’s Lagarde Keeps Talk Of Tapering At Bay
ECB’s Lagarde Keeps Talk Of Tapering At Bay

     - ECB kept its policy stance unchanged in June

     - Lagarde reaffirms very accommodative monetary policy position

     - Staff projections for growth and inflation revised higher

     - Sources: Three members on ECB board expressed desire to taper


    By Harry Daniels 

    LiveSquawk News 



    10 June 2021 | 17.00 GMT 


    The European Central Bank left its monetary policy and forward guidance unchanged as expected on Thursday but updated the economic projections. It confirmed its intention to continue its net asset purchases under the pandemic emergency purchase programme (PEPP) for a total of EUR1.85 tln until at least the end of March 2022.


    On a day when the press conference coincided with the release of US inflation data, it was perhaps fortuitous ECB President Christine Lagarde kept on message.


    “President Lagarde might not have minded having her thunder stolen by the US CPI number today, especially given what little new information she had to offer,” said Societe Generale’s Anatoli Annenkov.


    Initial market reaction to the announcement was constrained with both 10-year Bund yields and the Euro relatively unmoved.


    Upward revisions to forecasts


    Updated Eurosystem macroeconomic projections reflected a more optimistic outlook at the central bank. ECB staff now predict annual real GDP growth at 4.6% this year, 4.7% in 2022 and 2.1 per cent in 2023. The ECB’s macroeconomic outlook for economic activity was revised up for 2021 and 2022, while left unchanged for 2023 versus March’s numbers.


    Annual inflation expectations were upwardly adjusted for 2021 and 2022. Staff now predict 1.9% for 2021, 1.5% in 2022 and 1.4% in 2023. Lagarde said that slack, as well as a higher euro were set to dampen inflation pressure at the start of 2022.


    Oliver Rakau, chief German economist for Oxford Economics said, “In an apparent nod to more hawkish council members, President Lagarde highlighted small upward revisions to the core inflation forecasts. We think that this could be an early sign that the council – armed with updated forecasts – will have a proper discussion about tapering PEPP purchases by September.”


    Timing of the message


    When asked during the press conference about discussions around tapering of bond-buys, Lagarde responded, "We believe that the steady hand is actually the right response," and pointed to the governing council’s current balanced risk assessment for the euro-area economy. Yet, sources told Reuters news agency that three of the 25 members of the governing council wanted to reduce the pace of PEPP at the meeting, citing a better outlook for growth and inflation.


    Societe Generale analysts proffer that by September, it will be important to start preparing markets for gradually lower QE purchases, insuring against upside inflation surprises in the US. “The timing of the Strategy Review, still expected this autumn, is increasingly becoming entangled with the decision on the future of the PEPP (and possibly the debate on new EU fiscal rules). While the two should be unrelated, one being focused on the long-term framework and the other on the operational short-term policy stance, there is a risk that the messages may hard to disentangle,” posited Annenkov.