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Early estimates for post-Covid bond buying are circulating among European Central Bank officials, with some telling MNI the ECB's toolbox should be adapted to allow for purchases to continue at around half the current level after the Pandemic Emergency Purchase Programme concludes its active phase in March.
With ECB asset purchases currently running at about a net EUR100 billion a month, that could translate into somewhere between EUR40 billion and EUR60 billion a month from next April onwards, even if the eurozone returns to 2019 growth levels, one official said. Another said purchases at about half today's levels would be "well within the makeup of our expectations," adding that these could come from the ECB's Asset Purchase Programme and other facilities. A third official said EUR60 billion would be a "realistic" figure for purchases after next March.
"I have no doubt there will be arguments at both ends of the spectrum when the time comes, but that is probably a discussion for November and December," one source said, speaking as Austrian National Bank Governor Robert Holzmann told MNI earlier this week the ECB's Asset Purchase Facility could run at only EUR20 billion a month in 2022.
EURO A CONCERN
A debate is expected towards the end of the year over possibly granting the Asset Purchase Programme some of the PEPP's additional flexibility in order to buy more bonds if necessary. In the meantime, June 10's Governing Council meeting will focus more on whether to continue PEPP purchases at their current pace. While the economy is improving sharply, financial conditions may also be tightening again, with bond yields rising in recent weeks.
"What will be key is how much of this the Governing Council decides is due to an increase in inflation expectations, and how much is a tightening of real interest rates," one source said, adding that the strengthening euro was also a cause for concern, but that the ECB would keep any concern over the exchange rate low key. "The ECB is always very shy of talking about this for obvious reasons, but obviously this also weighs on Council deliberations."
Asset purchases usually fall over the summer, another Eurosystem source said, suggesting they might be kept elevated into early July. The ECB could, though, at its June meeting, adjust the language adopted in March in response to a surge in global bond yields, when the Council said it would conduct purchases at a "significantly higher pace than during the first months of the year", the source said.
"The real issue is not so much the pace, but whether the real economy's performance will give hawks a strong argument to not to use the whole [EUR1.85 trillion PEPP] envelope till March 2022," said another official, anticipating that northern states would point to hundreds of billions of euros of Covid aid money and impetus from U.S. growth. "I expect hawks' arguments and pressures to intensify pretty soon."
Some national central banks, including the Bank of France, which has made its position public, are preparing to argue for some of the PEPP's flexibility to be bequeathed to the APP, which is constrained by a capital key limiting the proportion of any country's bonds it can buy. Others lean towards creating an entirely new facility. The governor of the National Bank of Belgium has even said the PEPP's active phase could be extended beyond March if necessary, but officials who spoke to MNI said this was unlikely.
A more flexible APP could combine with "beefed-up" forward guidance, targeted longer-term refinancing agreements providing cheap loans for banks and possible interest rate cuts if necessary, one source said. "Clearly the PEPP is a bugbear for the hawks, so frankly we need to de-dramatise the withdrawal of the PEPP, but it will continue until next year."
Hawkish central banks, though, are likely to resist such changes.
"The position from northern parts of the eurozone is to enforce the rules for normal-time programmes," one official said. "This is a pandemic, it's temporary."
For the moment, the economic recovery is gaining strength, with one official saying June's macroeconomic projections could surprise to the upside with regards to growth and the near-term inflation outlook. But key inflation projections for 2022 and 2023 may stay unchanged from March, the official said.
The acceleration in the rate of price increases is generally expected to subside quickly.
"My impression is that we will be returning to levels clearly below 2%. This will be an important factor for the Governing Council, no doubt about it," one official said.
An ECB spokesperson declined to comment on the matters in this article.