MNI STATE OF PLAY: Speed Of PEPP Buys In Focus As ECB Meets

The European Central Bank will consider whether to slow the pace of its pandemic emergency purchase programme on Thursday, and the Governing Council could begin talks on the future of stimulus once the PEPP's active phase concludes in March.

Eurosystem staff growth and price projections are expected to be revised upwards, though inflation and financing conditions are now benign. But, while there are upside risks to inflation in Germany in particular, these are expected to fade going into next year, keeping the eurozone-wide measure at below-target levels in 2023, and global supply pressures and new Covid variants continue to feed uncertainty.

Rather than indicating a reduction in the pace of PEPP, now running at about EUR80 billion a month in net terms, the ECB could replace its commitment to continue purchases at "a significantly higher pace" than in the first few months of the year with a restatement of its readiness to buy more or less as circumstances dictate.

SYMMETRICAL TARGET

After adopting its guidance to its new symmetrical inflation target in July, promising to keep rates low or lower until inflation is seen durably reaching 2% well within the forecast horizon with compatible trends in underlying inflation, the ECB will keep rates on hold. An account of the meeting, though, showed some Governing Council members argued hard to avoid an excessively dovish message.

With Covid uncertainty persisting, a debate could begin within the Council over the future of stimulus once the EUR1.85 trillion PEPP's net purchases conclude in March, but any decision is unlikely before December.

Key questions for President Christine Lagarde include what more, beyond adjusting forward guidance, the ECB will do to get closer to its 2% medium-term inflation target, assuming inflation does fall back to lower levels, or what it will do if growth and inflation levels continue to diverge significantly across member states. Recent press conferences have seen Lagarde stress the positive impact of vaccinations and the increased resilience of Europe's economy to virus outbreaks, with little chance of a repeat of previous hard lockdowns. Barring any shocks, the risks to the economic outlook remain broadly balanced.