The European Central Bank (ECB) is reporting a cautious departure from the practice of massive bond purchases, which has been common since the onset of the corona pandemic. With an improved outlook for inflation, the volume of securities purchases or when the speed of acquisition is reduced will no longer be as important, German ECB Director Isabel Schnabel said on Monday at an online event from the Latvian central bank. “It is the end date that signals that the conditions for an interest rate hike are approaching,” added the German economist.
For sequence and timing, careful direction is required when the time is right. Given the economic recovery after the Corona crisis, the European Central Bank (ECB) decided to moderate the pace of its large-scale emergency bond purchases. Purchases under the PEPP purchase program are to continue at least until the end of March 2022. What happens next will likely be clarified at the December interest rate meeting.
Latvian central bank chief Martins Kazaks stressed that the ECB would proceed “very cautiously” when stopping crisis aid. Support will continue to be needed even after the PEPP program ends. According to ECB chief economist Philip Lane, bond purchases should not be stopped abruptly, even after the PEPP is deactivated. In addition to the emergency program, an “APP” bond purchase program is currently underway, with a smaller scope.
However, many observers expect its volume to increase if the PEPP expires. So far, the old APP program has also been designed to expire shortly before an interest rate hike. ECB Director Schnabel recently pointed out that before an interest rate hike, the central bank should first be convinced that inflation will approach the ECB’s 2% target on average. term. The inflation rate in the euro area jumped to 3.0% in August, the highest level in a decade. In Germany it was even 3.9%, with economists pointing to special effects such as the VAT cut last year and the sharp rise in crude oil prices. The central bank left the key interest rate at a record high of 0.0% despite rising inflation. In their latest forecast, ECB economists assume that the inflation rate in the eurozone will reach 2.2% this year. For 2022, however, they only expect an inflation rate of 1.7% and for 2023 of 1.5%, which would mean that the ECB would fall back below the 2% mark.