ECB seen laying out plans in Q4 to end emergency asset purchases: Reuters poll

BENGALURU - The European Central Bank is likely to announce long-awaited plans to reduce its pandemic-related asset purchases in the next quarter, according to a Reuters poll of economists, most of whom expected the programme to be wrapped up by the end of March.

With the euro zone economy growing at its fastest pace on record and inflation set to rise further, pressure on the ECB to taper its Pandemic Emergency Purchase Programme (PEPP) is building, as it is on other major central banks. [ECILT/US]

"While the ECB will start discussing phasing out PEPP in September, no decision will be made until December," wrote George Buckley, chief UK and euro area economist at Nomura, in a note to clients.

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"However, we see risks to this view. As COVID-19 cases rise, and uncertainty about the future of the virus in autumn remains, the ECB may want to continue purchases at the current rate until the end of the year, to prevent an unwarranted rise in yields."

While new variants of the coronavirus remain a threat to the world economy, most euro area countries have lowered the public health risks and the likelihood of further lockdowns with successful vaccination drives.

The latest Reuters poll, taken Aug. 9-13, was more specific than the previous one, asking for the timing of the announcement of a taper as well as when it would start. This time, 12 of 29 economists predicted a September announcement and 15 picked next quarter, with 10 saying December. Two said in the first half of next year.

The ECB will no doubt carefully consider the timing of its decision and communication around it given the U.S. Federal Reserve is facing a similar policy dilemma and possible negative reaction in markets if it moves too quickly.

"Crucially, the ECB’s discussions will take place against the backdrop of a possible ‘taper tantrum’ in the U.S., after the Fed told markets in June it has started the discussion on tapering its asset purchases," said Bas van Geffen, senior macro strategist at Rabobank, referring to a potential spike in bond yields in response.

"But assuming that the (Fed) will give this advance notice in September, that still leaves PEPP in place to mitigate any potential impact in Q4, with enough room to maintain the ‘high pace’ of purchases through December," he said.

Asked when the ECB would start tapering, 18 of 29 said before the end of this year and 11 said next year. Over 85% of economists, or 29 of 34, predicted the programme would be closed by the end of the first quarter of 2022.

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But analysts pointed out that would only be the first stage of ending asset purchases as the ECB still has an active Asset Purchase Programme (APP).

"If you add up all the PEPP investments, and the APP purchases and reinvestments, the ECB is going to buy more than 50 billion (euros) per month of public sector bonds, irrespectively of net new PEPP purchases," said Piet Haines Christiansen, chief strategist at Danske Bank.

"So, the ECB is still going to buy an awful lot of bonds."

In the meantime, the euro zone economy was expected to grow 2.1% this quarter and 1.2% in Q4, down from 2.4% and 1.3% predicted in July.

Growth was expected to average 4.6% this year, the fastest since the single currency was launched more than 20 years ago, versus 4.5% in last month’s poll. Growth was forecast at 4.4% next year, slightly up from 4.3% predicted in July.

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While economists upgraded their inflation forecasts to a peak quarterly average of 2.8% in Oct-Dec, it was expected to fall to 1.5% in 2022 as a whole, well below the central bank’s 2.0% target.

The euro zone jobless rate, which reached a pandemic peak of 8.6% in August and has drifted down to 7.7%, is forecast to take at least a year to reach its pre-pandemic 7.4% rate.