The Governing Council of the European Central Bank (ECB) decided, on Thursday 9 September, to slightly slow down the pace of massive purchases of securities - mainly government securities - under the Pandemic Emergency Purchase Programme (PEPP), considering that this recalibration allows for preserving favourable financing conditions in the euro area.
ECB President Christine Lagarde painted a picture of a stronger-than-expected economic recovery, with the Covid-19 vaccination campaigns helping to reopen the economy, especially in the services sector.
Although the spread of the delta variant of the Sars-Cov-2 virus is fuelling a dose of uncertainty, “the impact of the pandemic is less severe”, she noted, citing several green lights such as household consumption and the upturn in the labour market. She said growth will remain robust in the third quarter and noted that euro area GDP is expected to return to its pre-crisis level by the end of 2021, “two quarters earlier than expected”.
On this basis, the ECB revised its growth projections for 2021 upwards to 5% from 4.6% in June (see EUROPE 12738/24), while keeping those for 2022 and 2023 unchanged at 4.6% and 2.1% respectively. The risks to growth are considered broadly balanced.
“We are getting closer. But we are not out of the woods yet”, she said, advocating for continued “more targeted, more surgical” fiscal support for the economy. The time will come for a return to fiscal consolidation once the reform of the Stability and Growth Pact is confirmed, she said.
This has an impact on price increases, which have a symmetrical target of 2%. According to the monetary institute, inflation should be slightly higher than previously estimated and reach 2.2% in 2021, 1.7% in 2022 and 1.5% in 2023, while the path estimated in June was 1.9%, 1.5% and 1.4%. The current strong price increase (3.0% in August) will fade in the medium term, according to the ECB, but it does not rule out price pressure from shortages of certain products combined with sustained wage increases.
The ECB President did not say at what level the ECB would set its monthly rate of purchases under the PEPP. At present, this rate is €80 billion within a total envelope of €1,850 billion programmed until March 2022. This pace had accelerated in the spring in response to a surge in inflation (see EUROPE 12676/28).
But Ms Lagarde stressed that the decision of the Governing Council, taken unanimously, was a recalibration of the operation and not a tapering, while some central bank governors are already calling for such a shift. “The lady isn’t tapering”, she said.
Asked how long it would take to alert the markets to an exit strategy from the PEPP, the former IMF Director said that the December Board of Governors meeting would be “interesting”. “We need to discuss the terms and conditions of how that term occurs” at this meeting on the basis of updated data and growth projections for 2024.
Basel III. Questioned on the ECB’s letter asking the European Commission to stay the course on the implementation of the international agreement strengthening banking prudential rules, the vice-president of the Frankfurt-based institute, Luis de Guindos, stressed the importance of “fully” implementing this agreement which will produce “many benefits for banks and the economy”.
A Commission proposal revising banking and insurance prudential rules is scheduled for early October. (Original version in French by Mathieu Bion)