European Central Bank to expand asset purchase programme
By Neil Dennis
13:10, 16 December 2021
The European Central Bank adhered to its dovish stance on Thursday, announcing it was expanding quantitative easing under is asset purchase programme (APP), even as it winds down its emergency bond purchasing scheme.
The ECB Governing Council decided to turn the volume up on the APP, currently running at asset purchases of €20bn a month, to €40bn in the second quarter of 2022 and then €30bn in the third, before resuming purchases at €20bn for “as long as necessary to reinforce the accommodative impact of its policy rates”.
PEPP reinvestment
The central bank also announced extensions to the reinvestment of its bond purchases and – if necessary – a resumption of its pandemic emergency purchase programme (PEPP).
While the ECB plans to push ahead with tapering its €1.85trn ($2.09trn), aiming to end the scheme in March, the central bank said it plans to extend the reinvestment horizon for the PEPP.
“The Governing Council now intends to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2024,” the ECB said.
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Omicron effect
While both the US Federal Reserve on Wednesday and the Bank of England earlier on Thursday announced monetary tightening measures – with the BoE raising interest rates for the first time since October 2017 – the ECB retained its dovish position in the face of slowing economic growth and rising Covid-19 infection rates.
Wary of tightening too soon – following widespread criticism of its decision to raise rates in 2011 as the eurozone sovereign debt crisis was unfolding – the ECB chose to stick to its mantra that much of the inflationary pressure driving the annual headline rate up to 4.9% in November is “transitory”.
However, the latest wave of coronavirus infections hitting Europe could complicate this view in the coming months as countries in the region respond with restrictive measures that are likely to exacerbate supply chain bottlenecks as consumption switches again from services to goods.
Not so dovish?
Yet markets were positive, with the euro gaining ground against both the dollar and yen as the details appeared – perhaps – less dovish than expected.
“The ECB will reduce its total net purchases from an average of €92bn per month between September and November this year to less than half that pace by April,” said Andrew Kenningham, chief Europe economist at Capital Economics.
He added: “While this falls well short of the ‘full taper’, which the Fed has now stepped up, it is still a big reduction in policy support.”
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