Thu. Jan 20th, 2022

Economists expect the European Central Bank to continue its net asset purchases for another two years – long after other major central banks began downsizing theirs – according to a Financial Times survey.

Three-quarters of the 32 economists surveyed by the FT said they expected the ECB to stop expanding its € 4.6t bond portfolio in 2023; just over a quarter said they think it will do so before then.

Many central banks around the world have already started reduce their monetary stimulus in response to sharp rises in inflation as the world economy recovers from the shock of the coronavirus pandemic.

The ECB was slower than most; in December, its president Christine Lagarde said its € 1.85 tonne pandemic response scheme would stop net bond purchases in March, while an older asset purchase scheme would undergo a “step-by-step” reduction until at least October. However, she did not specify when net asset purchases would stop altogether.

In contrast, the US Federal Reserve said last month that it would accelerate the branch of its bond purchases to close at the end of March, while the Bank of England said after raising interest rates last month that its net purchases would stop at the end of the year.

William De Vijlder, chief economist at French bank BNP Paribas, was one of those who predicted that the ECB would continue its net bond purchases until 2023. He said the biggest risk to the eurozone economy was that “supply disruption continues, causing inflation to remain high, leading to a full reassessment of the outlook for ECB policy”.

Eurozone inflation rose to 4.9 percent in November, a record high since the single currency was launched more than two decades ago, driven by rising energy prices, resurgent demand and supply chain bottlenecks.

Last year, the ECB agreed on a new strategy, committing itself not to raise its deposit rate from the current low of minus 0.5 per cent until it was convinced that inflation would reach its 2 per cent target within the next two years and for a further years would not stay there. It also requires that underlying inflation, excluding energy and food prices, be “sufficiently advanced” to reach its target. It said asset purchases would stop shortly before it raised rates.

More than half of the economists surveyed by the FT said they expect the ECB to start raising its deposit rate by 2023. More than a quarter thought it would not do so before 2024.

Lena Komileva, chief economist at G + Economics, predicted that the ECB would halt its bond purchases this year and raise rates by late 2023. Like several others, she warned against the risk of sharpening monetary policy too soon – something the ECB has been criticized for doing in 2011 when it raised rates twice on the brink of the eurozone’s sovereign debt crisis.

“While the impact of each new pandemic wave on growth is fading and inflation is likely to peak by the end of 2021, a policy story on fiscal and monetary support for capital in the private sector – industry, banking and entrepreneurship – is in an ongoing withdrawing pandemic by far the biggest risk for the prospects, ”she said.

Nearly four-fifths of economists predicted that the ECB would tighten policy in the summer by making the rate less attractive on the subsidized loans it provides to banks, known as targeted long-term refinancing operations. These € 2.2tn loans at rates as low as minus 1 percent give banks an easy source of profit by effectively paying them to borrow money.

Economists were evenly divided over whether the EU’s new € 800 billion recovery fund would significantly reduce the chances of a bond market sell-off in the eurozone. The fund provides grants and loans from Brussels to member states to support their economic recovery in exchange for structural reforms.

“Peripheral spread levels are tight, and volatility could rise as the ECB reduces its purchases,” said Alberto Gallo, portfolio manager at Algebris Investments, referring to the spread between the borrowing costs of weaker countries on the periphery of Europe, such as Italy and those of stronger ones. countries. such as Germany.

“We can see particular volatility around French elections and possibly around Italian elections,” he warned.

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