MNI ECB Review - December 2021: Retaining Optionality

MNI ECB Review - December 2021: Retaining Optionality

While the main thrust of the December ECB meeting was in line with market expectations (ending net purchases under PEPP in March, temporarily scaling up monthly purchases under the APP and no decision on TLTROs), the nuance of the announcement diverged quite a bit from what most were expecting. Specifically, the duration of PEPP reinvestments being extended until at least the end of 2024 and the increase APP purchases to EUR40bn/month in Q2, EUR30bn/month in Q3 and EUR20bn/month in Q4. The total increase in the APP was smaller than expected, with the fixed schedule and downward adjusting purchase volumes each quarter, also catching the market off guard.

While the ability to flexibly use PEPP reinvestments, extension of the reinvestment horizon, and the ability to reactivate PEPP net purchases if needed, were a touch dovish, overall, the policy announcement was at the more hawkish end. However, the policy announcement should perhaps not be framed by whether it is slightly dovish or slightly hawkish, but rather that it reflects the ECBs desire to retain flexibility and optionality – an element which we stressed in our ECB Preview. As we argued, there is heightened uncertainty over the economic and inflation outlooks, and it would be difficult at this juncture to have firm convictions on likely outcomes. The current policy setting allows the ECB to gradually scale back accommodation and pave the way for future rate hikes, while also providing an insurance option (flexible PEPP reinvestments and reactivation of net purchases under PEPP) if the pandemic deteriorates further and destabilises the recovery.

For the full publication please see:

ECB Review Dec 2021.pdf