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MNI (London)

The European Central Bank is likely next week to open the way to a boost in its Asset Purchase Programme to up to a flexible EUR40-60 billion a month following the end of the active phase of its Pandemic Emergency Purchase Programme in March, several sources told MNI, though some governors are arguing that upscaling APP would be inappropriate given rising inflation.

“There are no firm numbers yet....... there is still a need to agree them, but I still believe that we will settle at a [net new] purchase level around 40 - 50 billion a month -- perhaps the lower end given the concern of many over current headline inflation rates, although we must avoid any severe cliff-edge effects,” one eurosystem official said, speaking ahead of next week's key Governing Council meeting.

ECB officials have long expected that the PEPP would be followed by an increase in the APP’s EUR20 billion runrate, for perhaps 9-12 months, he said. Initial expectations had been for total purchases of EUR500 billion during this period, though this may now turn out to be lower.

“Of course, any agreement on size now can always be amended -- up or down -- as needed in future times,” the official said, noting that the ability to amend the rate of purchases would not be the same as setting a maximum envelope with the intention of not using it all.

FLEXIBILITY

“We could say not all has to be used, but be symmetric saying more could be used if need be. That will fit nicely with a key thematic moving into 2022 of maximum flexibility.”

Other sources roughly agreed with these numbers, with one eurosystem official pointing to somewhere in the region of EUR40-60 billion, a range which MNI first reported being considered in May. (See MNI SOURCES: ECB Seen Halving Asset Purchases After PEPP) A former official said he would guess the year’s purchases would total EUR300-400 billion, with the rate calibrated according to financing conditions and inflation and flagged in speeches by policymakers.

“As it's Christmas time, there might be a small parcel under the tree,” one of the officials said. ”I’m not sure this would convince everybody, but it won’t be necessary to convince everybody.”

While the sources pointed to a bolstered APP as a likely outcome, some Governing Council members are likely to resist an increase in its purchase envelope at a time of rising inflation.

Other officials declined to specify likely purchase amounts as final agreement remains to be had not only on that but also on how purchases are made. Two officials said that extending the PEPP for a quarter or two beyond March remains an option, as Covid’s Omicron variant adds to uncertainty. Others said this possibility was now unlikely.

PEPP "IN THE FRIDGE"

The ECB is though likely to point to the possibility that the PEPP, which will continue to make reinvestments, could be reactivated.

“You can take the PEPP and put it in the fridge,” one official said. “You don't have to destroy it.”

Another possibility has been highlighted by the ECB's former director general of market operations Francesco Papadia, who suggests that fixed APP purchases could remain at EUR20 billion a month, while an additional envelope would be available to spend if financial conditions deteriorate, effectively functioning like a form of yield curve control.

Other mooted options, including loosening the rules on APP bond buying or creating a new envelope for a “sleeper PEPP” only to be used in an emergency, may prove too controversial, officials said.

December’s monetary meeting will be the last attended by outgoing Bundesbank president Jens Weidmann - a fact to be considered when weighing up the size of any additional stimulus package.

“Of course, it can't be too big, because otherwise the new Bundesbank present won't be very happy with his present,” one source said. “Also for political reasons. It would be very hard messaging for the new government.”

Current guidance for the ongoing rate of PEPP purchases, which specifies a “moderate” reduction in pace compared with last December, could be adjusted further downwards or left unchanged, sources said.

An ECB spokesperson declined to comment to MNI.

MNI London Bureau | +44 203-865-3829 | jason.webb@marketnews.com
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MNI London Bureau | +44 203-865-3829 | jason.webb@marketnews.com
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