Europe could see less stimulus, but it’s not a taper – yet

Europe could see less stimulus, but it's not a taper - yet
The European Central Bank may be ready to cut back some of its emergency support for the economy

The European Central Bank may be getting ready to trim some of its pandemic support but is likely to reassure markets it is not yet setting a firm date to wind down its massive bond purchases as the delta variant casts a shadow over the coming winter.

The bank’s 25-member governing council meets Thursday at the bank’s skyscraper headquarters in Frankfurt Germany, as data show businesses strongly ramping up activity and retail foot traffic exceeding pre-pandemic levels. The 19 countries that use the euro bounced back from a double-dip recession in the second quarter with economic growth of 2.2% from the previous quarter.

Analysts say the ECB could use the flexibility built into its pandemic support by saying it will slow the pace of bond purchases under the 1.85 trillion euro ($2.2 trillion) support program. But they expect ECB head Christine Lagarde to be at pains to say it is not phasing out the purchases, and to caution that the economy still needs plenty of help as it heads into an uncertain winter with cases rising in several countries due to the more contagious delta variant of the coronavirus.

The decision comes as central banks including the U.S. Federal Reserve are looking ahead to how they will exit massive pandemic support efforts that have come alongside increased government spending across the developed world.

Any ECB move Thursday is expected to be a tweak of existing policy, with a potentially more serious debate among council members coming in the months ahead about when and how to wind the program down, and whether to continue some of the purchases by moving them to a smaller, ongoing bond purchase program. The purchases, which aim to support the economy by driving down longer-term borrowing costs for companies, are slated to run at least through March 2022.

The decision and Lagarde’s assessment at her post-meeting news conference will be closely watched because any shift in central bank policy can have wide-ranging effects on borrowing costs, stock and bond markets and growth. For one thing, the ECB has played a key role in cushioning the blow from the pandemic by holding down bond market rates. That has made it easier for governments to borrow and deliver crucial support to ordinary people and businesses large and small through tax breaks, loan guarantees and salary support for furloughed workers.

Analysts say the bank could modify its promise, made as the outlook worsened in March, to purchase “significantly” more bonds.

Although the pandemic purchases have no set monthly amount, Oliver Rakau at Oxford Economics said that the bank could cut monthly purchases from roughly 80 billion euros per month currently to 70 billion euros while carefully distinguishing the move as a mere “policy calibration” — separate from any announcement that the program is heading toward its end.

Even at the lower pace, that would still be enough for the ECB to soak up all the new debt issued by eurozone governments through the end of this year.

The U.S. Federal Reserve indicated Aug. 27 it was moving closer to scaling back its $120 billion in monthly bond purchases, although weaker-than-expected data on U.S. jobs growth on Friday underlined that tapering may be farther off than first thought. The Bank of England maintained its stimulus levels at its Aug. 5 meeting, although it laid out a road map for eventually starting to reduce its bond purchases in years ahead.

Higher inflation across the globe has raised questions about whether central banks will eventually need to tighten monetary policy to cool off the economy. In the ECB’s case, inflation of 3% in August exceeds the bank’s goal of 2%, but bank officials and economists think that is due to temporary factors. The bank foresees inflation of 1.5% next year and only 1.4% in 2023. New projections are due Thursday; if the inflation outlook is raised, that would on balance suggest an earlier reduction in stimulus.

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