European Central Bank to Cut Pandemic Bond Buying, More Dovish than Bank of England

Posted on 12/17/2021

In the first quarter of 2022, the Governing Council of the European Central Bank (ECB) expects to conduct net asset purchases under the pandemic emergency purchase programme (PEPP) at a lower pace than in the previous quarter. It will discontinue net asset purchases under the PEPP at the end of March 2022. The ECB however was stern on continuing its unprecedented monetary policy support for the euro zone economy into 2022. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25%, and -0.50% respectively.

The ECB Governing Council decided to extend the reinvestment horizon for the PEPP. It now intends to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2024. In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance. Bond buying under its 1.85 trillion euros PEPP, which is due to end in March 2022, will be cut next quarter as the scheme winds down.

The ECB press release adds, “In particular, in the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time. This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it is still recovering from the fallout of the pandemic. Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.”

Asset Purchase Program
In line with a step-by-step reduction in asset purchases and to ensure that the monetary policy stance remains consistent with inflation stabilising at its target over the medium term, the EXB Governing Council decided on a monthly net purchase pace of €40 billion in the second quarter and €30 billion in the third quarter under the asset purchase programme (APP). From October 2022 onwards, the Governing Council will maintain net asset purchases under the APP at a monthly pace of €20 billion for as long as necessary to reinforce the accommodative impact of its policy rates. The Governing Council expects net purchases to end shortly before it starts raising the key ECB interest rates.

Bank of England Tries to Tame Inflation
The Bank of England has raised interest rates for the first time in more than three years in a bid to tame inflation. The increase is to 0.25% from 0.1%. This is after this week that showed prices climbing at the fastest pace for 10 years. The Bank of England sees inflation running at 5.1%, the highest in a decade, and the central bank expects it to rise further early next year.

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