Considering that the euro area has learned to live with the virus responsible for Covid-19, the European Central Bank (ECB) decided on Thursday 16 December to put an end, after March 2022, to the ‘PEPP’ programme for massively repurchasing mainly public securities, which was put in place two years ago to address the pandemic (see EUROPE 12450/6).
In the face of remaining macroeconomic uncertainties, it will maintain a very accommodating monetary policy to ensure the desired anchoring of the inflation trend in the medium term.
“We believe that the progress on economic recovery and towards our medium-term inflation target permits a gradual reduction in the pace of our asset purchases in the coming quarters”, said Frankfurt-based President Christine Lagarde. “But monetary accommodation is still necessary”, she added, stressing the importance of acting with “flexibility” and having a wide range of instruments to respond to any “threat” to the transmission of monetary policy to the economy and, ultimately, to price stability.
PEPP. On Thursday, the ECB Governing Council therefore took the following decisions almost unanimously: - the pace of purchases via the ‘PEPP’ programme will decrease in the first quarter of 2022 compared to the pace set in September (see EUROPE 12787/1); - the net purchases will end after March, but, if necessary, the Governing Council could decide at any time to reactivate them to counter “negative shocks related to the pandemic”; - the amounts invested via the ‘PEPP’ programme reaching maturity will be reinvested until at least the end of 2024, one year later than originally planned.
On this point, Ms Lagarde insisted on the flexibility of these investments “in terms of timing, categories of securities and jurisdiction”. This could include the repurchase of Greek government debt, she noted, in order to avoid any disruption that could lead to a surge in interest rates on these sovereign securities, which cannot be acquired via the ECB’s ‘APP’ programme due to the poor financial rating of Greek securities.
APP. In addition to the likelihood of keeping its key interest rates unchanged, the ECB has decided to restart the ‘APP’ programme from April onwards, to compensate for the discontinuation of the ‘PEPP’ operation. The pace of monthly purchases via the ‘APP’ operation will be €40 billion in the second quarter, €30 billion in the third quarter, and €20 billion from October 2022 onwards, almost until the first rise in key rates.
These monetary policy decisions were taken in light of an analysis of the macroeconomic situation and new growth and inflation projections for the euro area. They will be reviewed as the data are updated in 2022.
According to the ECB, the risks to the economy remain broadly balanced. Thanks to the vaccination campaigns, the recovery remains strong, albeit at a slower pace at the end of the year, and is expected to continue next year. As a result, wealth production is expected to exceed its pre-pandemic level in the first quarter of 2022, and unemployment has reached a very low level.
However, in the short term, the emergence of the Omicron variant of the SARS-CoV-2 virus is forcing euro area countries to reinstate some sanitary restrictions, material and labour shortages continue to be felt, and soaring energy prices are affecting purchasing power.
Euro area GDP growth is expected to reach 5.1% in 2021, 4.2% in 2022, and 2.9% in 2023 (compared to 5, 4.6%, and 2.1% respectively, according to the September forecast).
On inflation, Ms Lagarde said that the current path of price increases was moving towards the 2% target in the medium term. Calculated at 4.9% in November mainly due to soaring energy prices, inflation is expected to remain “above 2% for most of 2022”, remaining high in the short term before gradually declining over the course of 2022.
The ECB thus anticipates the following trend: 2.6% in 2021, 3.2% in 2022, in 1.8% in 2023 and 2024. This is “significantly higher” than the trend anticipated in September (2.2% in 2021, 1.7% in 2022, and 1.5% in 2023 respectively), Ms Lagarde acknowledged. Excluding energy and food prices, inflation would be 1.4% in 2021, 1.9% in 2022, 1.7% in 2023, and 1.8% in 2024.
More information on the decisions taken: https://bit.ly/3s9N67c (Original version in French by Mathieu Bion)