The ECB acknowledges that inflation is pushing its agenda


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All analysts agree that the European Central Bank could decide today
the pace of bond buying in the fourth quarter
, based on the fact that the economic recovery is progressing better than expected in much of the euro zone and above all due to the levels that inflation is already reaching in Germany. But the first official signal has been provided by Robert Holzmann, the governor of the Bank of Austria, who told Eurofi Magazine that the ECB is considering “tightening its policy sooner than many expect, since inflationary pressures could be persistent” .

The
ECB has maintained an ultra-lax policy since the start of the pandemic
and he promised an even longer expansionary period when he unveiled his new strategy in July. Nevertheless, inflation pressure has accelerated faster in the summer months than your experts predicted. Holzmann notes that persistent global supply bottlenecks, labor shortages, restrained household demand, the cost effects of climate change policies and inflation are also putting potentially upward pressure on prices. higher overall that is anchored in expectations. “This does not mean that we will withdraw the expansion prematurely, but that it will be necessary for a shorter period than what the markets expect,” said Holzmann. He also added that ultra-lax monetary policy can lead to financial imbalances, adverse distributional effects, and inefficient capital allocation.

It follows from these words that the ECB will reduce the stimulus and that it will promise significant support in the coming years. This makes the meeting that the Council will hold today in Frankfurt one of the most important in recent months. The market consensus varies after these statements and the analysts consulted by Bloomberg already have from September onwards a debt purchase rhythm that will gradually reduce. Through the Emergency Debt Purchase Program (PEPP), the ECB is buying 80,000 million euros of debt per month and by October it could reduce the amount to 70,000 million, according to this survey. By March 2022, the date on which the end of the program is scheduled, it could already be only 52,000 million. “Although the ECB is likely to report a somewhat slower PEPP buying pace in the next quarter due to lower yields and improved activity data, continued concern about the evolution of the pandemic and the still weak medium-term inflation outlook make a more significant reduction in flow support unlikely, “says Konstantin Veit, portfolio manager at PIMCO, who also adds that” we continue to expect a new PEPP purchase rate of € 60 billion per month, in line with the rate of purchases at the beginning of the year and with our view that the ECB will reduce the rate of monthly net purchases over time to € 60 billion per month in the second quarter of 2022. ‘

In addition to the measures adopted by the Council, the way in which its president, Christine Lagarde, decides to communicate them will be decisive. The withdrawal of stimulus will surely punish the stock markets and fixed income, but the promises of compensatory aid can mitigate the sharpest falls. And do not forget that the ECB can update its perception of the development of inflation and growth in the euro zone. “Looking at the updated ECB projections, we anticipate a slight upward revision of both GDP and inflation for 2021 and, given the positive effects, also for 2022,” advances Annalisa Piazza, fixed income analyst at MFS Investment Management. “We hope that the ECB recognizes the upward movement, but maintains the idea that the temporary factors that will be corrected from the beginning of 2022 and the low wage growth pose limited risks for inflation in the medium term,” he also notes. Veit says in this regard that “we do not expect a significant upward revision of the IPCA inflation forecast for 2023, which is 1.4%, and it is likely that we will have to wait until the December meeting to know the future of the PEPP more beyond its first completion date, March 2022 ‘.

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