The European Central Bank cut support for the euro zone economy by another notch on Thursday but promised copious support for 2022, confirming its relaxed view on inflation and indicating that any exit from years of ultra-easy policy will be slow.
With the euro zone's economy now back to its pre-pandemic size, pressure is mounting on the bank to follow its global peers in turning off the money taps. But policymakers are worried that stepping back too quickly could unravel years of efforts to rekindle once-anaemic inflation.
"The Governing Council judges that the progress on economic recovery and towards its medium-term inflation target permits a step-by-step reduction in the pace of its asset purchases over the coming quarters," it said in a statement.
Staying with its incremental approach, the ECB will cut bond purchases under its 1.85 trillion euro Pandemic Emergency Purchase Programme next quarter and will wind down the scheme next March in a long-flagged move.
It will, however, ramp up bond buys under the longer-running but more rigid Asset Purchase Programme (APP), keeping the ECB active in the market. The central bank for the 19-country eurozone has said it considers a recent spike in inflation to be temporary.
It will double bond buys to 40 billion euros under the APP in the second quarter before cutting them to 30 billion euros in the third quarter.
From October onwards, purchases will be maintained at 20 billion euros, for "as long as necessary" to reinforce the accommodative impact of its policy rates, it said.
The ECB also said that cash maturing from its emergency scheme will be reinvested until the end of 2024, a year longer than previously planned, and the funds will be spent flexibly to help markets in stress.
"This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy," the ECB said.
The move leaves the world's two biggest central banks on opposing courses after the U.S. Federal Reserve accelerated its exit from asset buys on Wednesday and flagged several rate hikes. Similar divergences have led to market turbulence in the past.
Although the ECB's "recalibration" will leave asset buys well below their current levels, the effective cut is likely to be much smaller as fresh government issuance will decline, so that the ECB will continue to hoover up most of the new debt.
The bank also maintained its forward guidance on interest rates and asset purchases, even as some had expected at least a tweak.
Its dilemma is encapsulated by an unusually uncertain outlook. Inflation is high and will come down more slowly than once thought. But growth is also slowing and a fresh wave of the pandemic could prove to be a further drag.
Attention now turns to ECB President Christine Lagarde's 1330 GMT news conference, at which she will unveil fresh economic forecasts that are likely to show inflation still above target next year, then holding below it in subsequent years.
Copyright©2022 Living Media India Limited. For reprint rights: Syndications Today