PEPP not guaranteed to end in March

The account of October’s ECB meeting suggests that it is by no means guaranteed that net PEPP purchases will end in March. And even if they do, the Bank may well leave open the possibility of re-starting PEPP purchases later in 2022 if needed. Meanwhile, we agree with the ECB’s message that investors have got ahead of themselves by pricing in interest rates hikes for next year.
Jack Allen-Reynolds Senior Europe Economist
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European Chart Book

Omicron adds to downside risks

High frequency data show that travel to retail and recreation destinations, restaurant bookings and flights have all declined in the past few weeks as coronavirus restrictions have been tightened in the face of rising hospitalisations. It now looks likely that GDP growth will be lower than our forecast of 0.7% q/q in Q4. The Omicron variant has added to these downside risks although at this stage its transmissibility, severity and capacity to escape vaccines are unknown. Meanwhile, we think euro-zone inflation has probably peaked at nearly 5% in November. If restrictions are tightened sharply, energy inflation may fall more than we have assumed, pulling headline inflation down a bit further and faster than we are assuming. But core inflation – which matters more to central bankers – could end up higher than anticipated if supply problems last for longer. Either way, it now seems likely that the ECB will maintain some capacity to keep bond purchases high and flexible beyond next March.

6 December 2021

European Economics Weekly

ECB’s line on inflation contrasts with the Fed’s

In contrast to those at the US Fed, ECB policymakers are not ready to retire their argument that the current bout of high inflation is temporary. This reflects the significant difference in inflationary pressures between the two economies. Next week, we will get the detailed breakdown of November’s German inflation data, which will shed more light on the stronger-than-expected outturn. Meanwhile, with less than two weeks to go until December’s ECB meeting, the Governing Council appears to have reached a consensus on some aspects of its asset purchase programmes. But comments from Christine Lagarde today suggest that it will avoid making any long-term commitments.

3 December 2021

European Data Response

Euro-zone Retail Sales (Oct) & Final PMIs (Nov.)

Euro-zone retail sales have levelled off since June, but rising Covid cases and the return of restrictions are likely to weigh on sales and other components of consumption in the coming months.

3 December 2021

More from Jack Allen-Reynolds

European Data Response

Euro-zone Final HICP (Oct.)

October’s euro-zone inflation data confirm that core price pressures are weaker than in other advanced economies. That said, we think headline inflation will remain above 2% until late 2022.

17 November 2021

European Economics Focus

ECB will persist with QE and negative rates for years

We expect the ECB to interpret a period of above-target inflation as “transient” even if it lasts for well over a year. Although it will end its emergency PEPP programme next March, the Bank will step up the pace of its conventional asset purchases, most likely from €20bn to €40bn per month, and leave its key policy rate unchanged at -0.5% until around 2025. It is also possible that the Bank establishes a “backstop fund” to be used in the event of an exceptional widening of credit spreads. All in all, our forecasts suggest that policy will remain very loose for longer than the markets currently anticipate, and this in turn should help the ECB to keep a lid on both core and peripheral sovereign bond yields.

15 November 2021

European Economics Weekly

Covid cases and inflation on the rise

Inflation releases in Germany and the US this week highlighted how price pressures are still weaker in the euro-zone. Next week, we will get the full breakdown of euro-zone inflation in October, which will give us more detail on the drivers of the increase in core inflation. Meanwhile, other data next week should confirm that that euro-zone GDP grew by 2.2% in Q3, but with daily Covid infections now having risen to the highest level since April, and showing little sign of slowing, there is evidence that consumers are becoming more cautious.

12 November 2021
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