Announcement tapering PEPP by the ECB by Christine Lagarde by the end of 2021. This is what some economists interviewed by CNBC said they expected, following the shock data relating to inflation in the euro area, which has rekindled the fears of a reduction in the so-called Pandemic QE.
That data, released just a few days ago, confirmed that Eurozone inflation has soared to a ten-year high: to be precise, consumer prices rose 3% annually in August, surpassing Bloomberg’s consensus forecasts and reaching the top for more than ten years.
Core inflation, which eliminates volatile elements such as energy and food, reached 1.6%, the highest level since 2012.
The question is inevitable: And now? Is it time to taper in Europe too? The answer, according to some, is yes.
By the end of the year, it will not be only Jerome Powell’s Fed to announce the tapering of its asset purchases in times of the Covid-19 pandemic, according to what emerged from the speech that Powell made at the event. Jackson Hole: Lagarde will also be somehow forced to make the announcement.
ECB, analysts: PEPP tapering announcement in December
The next meeting of the Governing Council of the ECB is imminent, on the calendar next Thursday, September 9th.
Experts believe that the announcement of the tapering will be postponed by a few more months, and identify the more or less perfect timing in December.
“I think an announcement in December is likely,” predicted Gilles Moëc, chief economist at AXA Investment Managers, in an interview with Cnbc. “I think they want to give themselves some time and have the new estimates available”, before making a decision, continued Moëc.
According to Chiara Zangarelli, economist for Europe at Nomura, in addition to studying the upcoming projections on inflation, unemployment, GDP, the ECB will also want to understand the evolution of the pandemic in the coming months.
That said, too if the Delta variant worries, according to Zanganelli it will be difficult for even the most dovish exponents of the European central bank to postpone the announcement of the tapering beyond the month of December.
The program PEPP (Pandemic Emergency Purchase Program) was developed and launched by Christine Lagarde’s ECB in March 2020, to address the disastrous economic and financial consequences of the Covid-19 pandemic.
Its endowment is equal to 1.85 trillion euros, and the deadline was set by Lagarde a March 2022, without prejudice to the possibility of extending it.
But euro area inflation galloped in August at the rate of 3%, against an ECB target of 2%.
ECB, with PEPP tapering attention to Greece
The PEPP program is flexible, Frankfurt has repeated several times: so flexible that it also provides for the purchase of government bonds are issued by Greece that do not have a sufficient rating to be purchased under other programs (such as the APP, Asset purchase program, active from October 2014 until December 2018, then relaunched at the end of 2019, with asset purchases for 20 billion euros per month).
If the PEPP were reduced, only to be withdrawn altogether, Athens bonds would lack an important crutch, which also justified their surprising recovery.
In fact, a reassurance has recently come from Philip Lane, chief economist of the ECB who, in an interview with Reuters, stressed that the ECB would still continue to guarantee an assist to government bonds. Like? Reinvesting all the securities that will expire until the end of 2023.
Will it suffice given that, not having an investment grade rating, the purchase of Greek bonds is not contemplated by the other bazooka APP? Yesterday Athens issued government bonds with a maturity of 5 and 30 years, during an auction that was described as a “success” by the Minister of Finance Christos Staikouras, and which allowed the coffers of Greece to collect € 2.5 billion.
The redemption of the Hellenic bonds is there for all to see: in the last five years, the securities have guaranteed a return of 120%.
But the godsend could be nearing the end, especially if the PEPP ends.
Not everyone believes, among other things, that yesterday’s auction was really a success. Indeed, investor demand was even to 18.9 billion euros, down from 29 billion euros of the demand that had as its object the 10-year bonds that Athens had issued in June, and with which it had always raised 2.5 billion euros.
“Greece is issuing bonds at a difficult time, in which there is concern about the end of the PEPP, a factor that will certainly be detrimental to demand ”.
Fear also for the other euro area countries which, with the tapering of the ECB, would inevitably see their sovereign debt purchases reduced.
Yesterday, for example, 10-year BTP rates rose to 0.72%, testing the record of the last six weeks, and serving the fear that the ECB will react to inflation by starting to pull the plug from the PEPP.
ECB, analysts: after PEPP great unknown will be APP bazooka
After Lagarde’s big announcement on 8 July 2021, when the ECB’s inflation target has been officially changed, the Governing Council of the ECB met on 22 July last, modifying the forward guidance in line with the new strategy.
On that occasion, the institution’s number one took time on the PEPP. “We did not discuss Pepp”, he cut short, reassuring however that the purchases will go on at least until March 2022 and in any case until the ECB has deemed the Covid-19 pandemic over.
Consequently, there is no mention, not even of what some analysts anticipated, who in the previous months had predicted, among other things, also a metamorphosis of the PEPP.
The approach that the ECB gave in its last meeting in July was limited to confirming its intention to preserve a persistent accommodative monetary policy.
But some hawks had already made themselves heard and now, after the given shock on inflation in August, the tone has become more severe, with some members of the ECB they asked for a softer PEPP right away.
Given the uncertainty represented by the evolution of the Covid pandemic, it is difficult for the analysts themselves to rattle off various outlooks on what the ECB will be able to do:
“I think it is rather premature to predict whether purchases made with the PEPP will drop significantly,” he noted Guillaume Menuet, economist for Europe at Citi, in a speech on the CNBC broadcast “Street Signs Europe ‘- I believe that the indication will be that PEPP purchases will continue to be very high throughout the fourth quarter, before tapering takes place in the first quarter” of next year.
Moec of Axa Investment Managers added that, in its view, the PEPP will end in March 2022, as planned, therefore, and stressed that “the big debate will then be on what to do with the APP”, which is currently being used in conjunction with the pandemic QE.
Finally second Salomon Fiedler, economist from Berenberg, the APP will probably last until 2023, preceding what will be the first rate hike by the ECB which, in his opinion, could take place in the fourth quarter of 2023.
For his part, Zangarelli, of Nomura, believes that the APP will be expanded, once the PEPP expires: more information, he told Cnbc, should arrive at the ECB meeting in December. Last week, it was Lane himself who said that “there are no conditions to end the APP”. That is to say: “Regardless of when the PEPP may end, QE will not end. And that’s why we don’t need a huge amount of time to think about it. Of course, we can’t even extend it (Quantitative easing) for too long. But six months is a long time (for the PEPP). And in the fall, we will have to consider several issues relating to 2022 ″.
What could possibly blow up the ECB’s plans to announce tapering in December, at least according to what economists feared?
AXA Investment Managers’ Moëc responded promptly: “Covid, Covid, Covid”.
At the same time, the economist stated that the economic situation in the euro area is benefiting from the high vaccination rates and general prudence, which is preventing states from lifting the various restrictions imposed to stem Covid infections “. As a result, even if the pandemic worsens in the coming months, “The level at which the PEPP is being maintained today is very high”.
In short, too much aid for an economy that has clearly recovered from the worst. Even if it is not yet known whether the recovery is sustainable or not.