The European Central Bank (ECB) policy meeting continues to be the focus of market players today who are expecting a reduction in central bank emergency bond purchases amid a surge in high inflation and a strong economic recovery.
So far, the ECB is one of the dovish central banks. At last July’s meeting, policymakers had pledged to keep interest rates low for longer following weak inflation and concerns over the delta variant.
However, seven weeks later, the inflation rate was at its highest level in 10 years. Although the delta variant caused many countries to re -implement sanctions, the European Zone was seen to be successful in curbing the spread. Cases of the infection in Germany are on the rise, but new cases in France, Italy and Spain are down this summer.
Europe has also reopened sanctions and saw better improvements in economic data in May, June and July, but upward momentum faltered back in August, where almost every economic report in the European Zone showed slower growth.
Looking at inflation alone, it is enough to push the central bank to reduce asset purchases. Still, most policymakers are optimistic that the recovery will continue and inflation is seen as temporary, coupled with the uncertainty posed by the delta, causing them to be in no hurry to pull a stimulus.
However, unlike other central banks, the ECB has little room to make cuts. This is because, they buy bonds under the Pandemic Emergency Purchase Program (PEPP) and the Asset Purchase Program (APP).
Therefore, they can reduce the purchase of PEPP first before the purchase of APP is reduced. If PEPP is reduced, it will likely be reduced from € 80 billion to € 60 billion.
