MNI STATE OF PLAY: ECB Flexibility Future Crises Key: Lagarde

A broad majority of the European Central Bank’s Governing Council supported recalibrated and higher bond-buying under the asset purchase programme into Q2 2022, although they confirmed the end of the net purchase phase of the pandemic emergency purchase programme in March next year, President Christine Lagarde said Thursday.

Policymakers also decided to extend the reinvestments from PEPP until at least October 2024, and allow special provisions for Greek sovereign debt within the programme.

Monthly net purchases under the APP will be set at a pace of EUR40 billion in Q2, 2022, and EUR30 billion Q3, then maintained from October 2022 at a monthly pace of EUR20 billion for as long as necessary, Lagarde said. Net purchases under the PEPP could be restarted if needed to counteract negative shocks related to the pandemic, in line with MNI's latest sources story (MNI SOURCES: ECB Seen Buying E40-60 Bln After March) .

Having enshrined flexible purchases as crucial to dealing future crises, Lagarde said, there was no need to make any structural adjustments to APP. The Governing Council continues to expect net purchases under APP to end shortly before it raises key interest rates.

INFLATION PROJECTIONS HIGHER

December’s Eurosystem staff macroeconomic projections saw annual real GDP growth for 2021 at 5.1%, 4.2% in 2022, 2.9% in 2023 and 1.6% in 2024 -- representing a downward revision for 2022 compared with September’s projection, while for 2023 the figure was revised upwards.

Average euro area headline inflation reached 4.9% in November, and will remain above two per cent for most of 2022, Lagarde said. Annual HICP inflation is expected to reach 2.6% for 2021, 3.2% in 2022, 1.8% in 2023, and 1.8% 2024 -- levels Lagarde admitted were significantly higher than those foreseen in September. Average core inflation is projected much higher, at average 1.4% 2021, 1.9% in 2022, 1.7% in 2023 and 1.8% in 2024

OTHER MEASURES

The Governing Council will also assess both the special funding conditions under its Covid-specific longer-term targeted lending operations, TLTRO III, along with the calibration of its tiering system for reserve remuneration.

Financing conditions for the economy remain favourable, Lagarde said, and overall risks to the economic outlook are broadly balanced. But considerable uncertainty remains, with the economic effect of the coronavirus’s omicron variant yet to be assessed, the price of energy still unclear - although likely to stabilise next year - and the full impact of second round effects difficult to gauge.

Asked whether the ECB faces additional pressure in light of recent tightening moved from the Fed, Bank of England, Norges Bank and Reserve Bank of Australia, Lagarde said it was not possible to draw a direct comparison between their relative positions going into the crises, or their evolution since. An expansionary monetary policy therefore remain necessary for the eurozone, she added.