“While, in our opinion, economic developments would clearly justify at least having an initial discussion on the reduction, the mere mention of such a discussion could push bond yields further up and therefore undermine the economic recovery before it slows down. it has not really started, “said Carsten Brzeski, Global Head of Macro at ING Bank.
The central bank of the 19 countries that use the euro bought around € 85 billion per month in government and corporate bonds as part of a € 1.85 trillion (€ 2.25 trillion dollars) which is expected to run until at least early next year. Purchases raise bond prices and lower their interest rates, as price and yield move in opposite directions. This affects long-term borrowing costs throughout the economy, driving them down.
This is exactly what the bank wants at a time when many businesses are grappling with reduced demand and higher debt and must keep lines of credit open to be able to pass to the other side of the pandemic.
Any hint, however, that the ECB is considering cutting back on buying could push market rates up sooner than central bankers would like. That is why any discussion could be postponed until the bank meeting on September 9 or later.
The US Federal Reserve will face a similar communication challenge; several officials have said that as the economy recovers, the US central bank may need to reassess its position. Currently, he buys $ 120 billion in bonds every month. Fed policymakers will meet on June 15-16.
IHS Markit surveys of purchasing managers showed a sharp increase in activity in May, including for the hard-hit service sector. The index reached 57.1, anything above 50 indicates expansion. First quarter economic production statistics have been revised to minus 0.3% from minus 0.6%; the ECB expects a strong rebound in the second half of the year and growth of 4.0% for 2021 as a whole.
Rising inflation also complicates the ECB’s message. Normally, a rise in prices would lead a central bank to withdraw its stimulus. But in this case, ECB officials and economists argue that the recent higher inflation figures are the result of temporary factors that will subside, leaving inflation below the ECB’s target.
Eurozone annual inflation reached 2.0% in May mainly due to higher oil prices. The ECB’s target is lower but close to 2%. The baseline comparison with the decline in oil prices in pandemic year 2020 will soon be removed from statistics, meaning post-pandemic inflation could be lower than current figures otherwise suggest.
In recent days, senior bank officials have commented in favor of the stimulus, leading analysts to believe that no real change is coming on Thursday. At its March 11 meeting, the governing council said it would “dramatically increase” purchases related to the pandemic in the April-June quarter.
“After coordinated messages from ECB stakeholders in recent days, we expect the ECB to stay the course and continue to buy assets at the current high rate,” said Paul Diggle, deputy chief economist at Aberdeen Standard Investments. “But either way, investors will want to see the ECB thread the needle to talk about the economic recovery, while avoiding the dreaded word ‘tapering’.”