The Council of the ECB meets today in Frankfurt to resolve a purely dialectical question: how to say that the stimuli have not yet been lifted but slightly modifying the language and how to ignore in the speech a Germany’s inflation level That, well looked at, sows doubts in the deadlines for action. But summer is coming, the European economy makes progress after the pandemic collapse and Christine Lagarde has the head in other matters. From June 18 to 20, the ECB directors are taken to a three-day retreat, as a concentration of footballers, which aims to make important progress in the review of the entity’s strategy.
That meeting will in fact be the first face-to-face meeting of the ECB’s policy makers since before the pandemic. It will resume the momentum of the review process that began last year and had to be suspended, and will focus on defining a new inflation target, in addition to the new role of the ECB, issues of equality and climate change. That is why Lagarde will let the complaints about German inflation run today, because he has the high beams on and hopes that once the new goal is defined, it will no longer be a problem.
The economic reactivation, although not yet reaching pre-pandemic levels, furthermore contributes to a summery optimism tending to postpone conflicts. The reopening of entire sectors superficially justifies the price increases and entertains those who, in another context, would be demanding clues about when the withdrawal of the stimulus measures will begin. What Lagerde will not be able to avoid in today’s meeting will be the debate on the pace of debt purchases covered by the anti-pandemic program (PEPP), firmly anchored on the table of the ECB’s Governing Council and on which the ‘hawks’ they wish to present a purchasing reduction approach, given the marked improvement in growth prospects and the rebound in inflation.
“We believe that it is too early to take that risk and that the ECB will continue to be vague about its intentions, it will continue to support the market,” calculates Stéphane Deo, head of market strategy at Ostrum AM, who acknowledges that the debate “will continue to escalate with the economic recovery and QE will be increasingly questioned. “We do not expect major changes in monetary policy,” agrees Konstantin Veit, portfolio manager at PIMCO, “the ECB will review the PEPP purchase rate based on a new round of quarterly macroeconomic projections … it could decide to set a somewhat lower rate of purchases in the PEPP framework for seasonal considerations, but we do not expect the message to be one of reduced support for flows. ‘
Currently, the ECB buys € 80 billion per month under the PEPP and 20,000 million euros per month within the framework of regular asset purchase programs. The members of the Board consider that the current configuration of the monetary policy tools is sufficiently favorable, although it is not easy to reconcile with an inflation forecast of the ECB’s HICP for 2023 of 1.4%. “ECB policies support European risk assets, but at current valuations we see less scope for considerable spread compression, risks to the macroeconomic outlook remain high and a tough fiscal dominance regime is elusive,” Veit adds.
The practice of conducting a ecomprehensive joint valuation The current state of the financing conditions against the inflation outlook at the meetings in which new forecasts are available therefore adds interest to the June meeting, since the result of this evaluation will determine the rate of purchase of the PEPP during the next trimester. In its most recent forecasts, the European Commission (EC) improved its growth expectations for 2021 and 2022 to 4.3% and 4.4%, respectively. This is usually a leading indicator of the ECB’s service forecast updates, while the growth figure for 2023 is likely to remain unchanged.