Frankfurt, Germany skyline, with the European Central Bank building (right).
Getty ImagesEven though it has begun to talk about the possibility, the European Central Bank is unlikely to follow the Fed in surprising markets with indications that it would tighten monetary policy earlier than expected. Both the pace of the recovery and the nature of the inflation threat differ across the trans-Atlantic divide, and ECB President Christine Lagarde was eager to insist last week that the course for now remains resolutely accommodative.
The Federal Reserve’s indication on Wednesday that it would raise interest rates in 2023 sooner than markets thought, and had started discussing a reduction of its massive bond-purchasing program, sent the dollar up to two-month highs against the euro—still far, however, from making up for a 6% fall in the last year.
The asset-purchasing programs known as quantitative easing of the Fed and the ECB are different—currently at $120 billion a month in the U.S., now at €80 billion a month ($95 billion) in the eurozone. The ECB’s Covid-19 pandemic-specific program is larger, compared with gross domestic product, than the Fed’s, but it is also limited for now by a March 2022 deadline, and by a ceiling of €1.85 trillion—€1.1 billion of which having already been acquired since March last year.
Lagarde insisted in March that tapering wasn’t to be discussed for now, and the ECB last week reiterated its intention to buy bonds on the market at a “significantly higher” pace than at the beginning of the year.
A good reason to hold for now is that the recovery, although strong and with forecasts regularly revised upward, remains fragile. Worse, however, for the ECB is that inflation, which has also picked up on the back of the world economy’s gradual exit from Covid-19 lockdowns, remains muted, with little chance that it will reach the central bank’s annual “below but close to 2% target” before 2024 at the earliest.
Some analysts see the September ECB meeting as a good moment to give markets indications as to whether or not QE will be phased out and how quickly—which will happen anyway, given both the ceiling set by the central bank itself, and the March 2022deadline.
Lagarde and ECB officials have long insisted that both the deadline and ceiling could be modified if the economic recovery disappoints or if, for example, a new wave of the pandemic threatens. But the ECB, as other western central banks, is also confronted with the need to stabilize the size of its balance sheet at some point, if only to allow it to restore its capacity to act in a future crisis.
Complicating the eventual tapering discussion, besides the usual debates between the hawks and doves of the 25-member governing council, is the continuing “strategic review’ launched by Lagarde when she took over less than two years ago.
From its result will depend a decision to continue or not the ECB’s regular asset-purchasing program, now set at a pace of €20 billion a month. Tapering will take a different meaning if the central bank decides that its APP should be increased in the course of next year.
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Why the ECB Isn’t About to Follow the Fed’s Tapering - Barron's
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