The Governing Council of the European Central Bank (ECB) confirmed, on Thursday 28 October, its September decision to slow down the pace of massive purchases of securities - mainly public sector securities - in the framework of the PEPP (see EUROPE 12787/1).
“We continue to judge that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the second and third quarters of this year”, said the ECB President, Christine Lagarde.
According to the Frankfurt institute, the economic recovery in the euro area continues, helped by the lifting of health restrictions linked to the Covid-19 pandemic, but at a slightly slower pace than in the summer. As a result, wealth creation is expected to return to pre-crisis levels by the end of 2021.
The risks to the economy are “broadly balanced”, says the ECB. In the near term, the main risks linked to the pace of recovery are supply bottlenecks and rising energy prices, both of which are pushing up inflation which reached 3.4% in the Eurozone in September. But, according to Ms Lagarde, economic players will ensure that supply meets demand.
Inflation, inflation, inflation. On Thursday, the Governing Council “talked about inflation, inflation and inflation”, both in terms of the factors that make up inflation and its medium-term projections, noted the former head of the IMF. The ECB expects prices to continue rising until the end of the year and to start declining during 2022.
Ms Lagarde divided the factors causing higher inflation into two categories: pandemic and recovery factors (bottlenecks, delivery delays) on the one hand, and energy-related factors (rising demand in China, delivery levels in Russia) on the other.
“We have all reasons to believe that they will gradually fade away in the course of 2022” but “it will take a bit longer than we expected”, said Ms Lagarde. She also acknowledged that energy prices could only stabilise and not decrease.
In December, the ECB will have new inflation projections. It is at this point that it will consider its exit strategy from the PEPP. From my point of view, the operation will end in “March 2022”, said its president.
What is the answer to the markets that anticipate a first rise in interest rates in the autumn of 2022? Ms Lagarde acknowledged a difference in assessment between the markets and the Governing Council, whose analysis at this stage shows that the symmetric inflation target of 2% will not be reached by the end of the projection period. She recalled her ‘forward guidance’ on the future path of interest rates, and in particular the three cumulative conditions agreed in July which, if met, will allow for a rise in the key interest rates of the EU institution (see EUROPE 12767/16).
More information on the ECB’s decisions to maintain an accommodating monetary policy: https://bit.ly/3EmnZkA
Basel III. Finally, Ms Lagarde expressed some disappointment with the recent European Commission proposal to finalise the integration of the ‘Basel III’ agreement into EU prudential regulation (see EUROPE 12821/2).
The implementation timeframe, which pushes back the gradual application of the measures from 2023 to 2025, is not the one advocated for by the ECB as the single supervisor in the euro area, she noted. “I would have liked to have seen consistency and synchronisation” in the adoption of the Basel III agreement by all jurisdictions, she added, although she did not rule out the need to preserve the specificities of the European banking sector. (Original version in French by Mathieu Bion)