Thursday, January 27

Hawks fight for the ECB to withdraw stimulus in December

The Governing Council of the European Central Bank (ECB) meets this Thursday with the task of prepare for the crucial December meeting.

The market does not expect the body to announce major changes, but it does expect council members to debate the wide variety of issues on the table.

ING analysts point out that the debate “It will not only focus on real inflation rates, which have once again been higher than the ECB’s own projections, but higher energy prices and the continuing frictions in the supply chain are clearly complicating the life of the ECB. ”

The increase in inflation, which remains to be known whether it is transitory or more persistent than expected, will be the argument used so that the hawks urge the ECB to reduce monthly asset purchases, preferably at the December meeting.

Instead, pigeons could argue that higher energy prices will affect private consumption and thus will delay the eurozone’s recovery, warning against any premature withdrawal of monetary accommodation.

The increase in bonds puts pressure to raise rates

At the prospect that there will be no policy changes Yes, the markets will be very attentive to the press conference of the president, Christine Lagarde.

In it, Lagarde it will have to refer to the increase of the bond yield, which has moved significantly higher, reflecting market expectations of increasingly aggressive central banks on both sides of the Atlantic.

Germán García Mellado, A&G Fixed Income Manager, reiterate that inflation is temporary, thereby reinforcing the forward guidance communicated so far.

In this way, an attempt would be made to remove the possibility of an increase in the deposit facility, which the market is already discounting for the last quarter of 2022.

But for Carminag experts it is a contradiction since the ECB has failed to meet its objectives. “In other words, at its next meeting, the ECB must defend the credibility of its own commitments,” reiterates the manager.

December meeting will still convey caution

The new macroeconomic forecasts will be updated at the December meeting of the ECB.

It will also kick off the closing of the pre-pandemic purchasing program, known by its acronym in English as PEPP.

Konstantin Veit, portfolio manager at PIMCO, believes “that the Governing Council will avoid a precipitous effect on asset purchases” and will instead choose to gradually reduce the pace from the current € 90 billion per month to a stable rate of between 40,000 and 60,000 million euros per month during the second quarter of next year.

The agency is also likely to announce new Targeted Long-Term Financing Operations (TLTROs) in December, albeit on less generous terms than during the pandemic crisis phase.

In this sense, Veit believes that the new strategy of the ECB, with the increase of the inflation objective to 2 percent and the adoption of elastic bands, allows “to maintain the current configuration of the monetary policy for a longer time instead of relaxing the conditions aggressively ”.

A program to avoid a tightening of financing conditions

For the experts, it is no longer as important as reducing the PEPP but what measures the ECB will adopt to prevent financing conditions from tightening once the purchases are completed.

In that sense, they already take it for granted that a new purchasing program will be approved.

“A realistic scenario for the ECB to achieve this objective would be to replace the PEPP with a smaller and temporary“ post-pandemic ”one, Carminag predicts.

In this scenario, the transition of rate markets from the PEPP to the old asset purchase program (APP) would be much smoother.

At the same time, a new temporary program would give the ECB more flexibility compared to the APP to achieve its objectives.