Emergency purchases set to slow but ECB to buy bonds for years: Reuters poll

September 3, 2021

By Shrutee Sarkar and Swathi Nair

BENGALURU (Reuters) – The European Central Bank will announce a cut to the pace of its emergency bond purchases from next quarter at its meeting this month but will keep buying bonds through 2024 at least under its main programme, and possibly much longer, a Reuters poll showed.

With the euro zone economic recovery broadly improving on the back of widening vaccination campaigns and inflation at a 10-year high, the ECB was expected to announce on Sept. 9 a reduction in monthly purchases from its 1.85 trillion euro Pandemic Emergency Purchase Programme (PEPP) ahead of the Federal Reserve’s own taper decision.

Nearly 60% of economists, or 25 of 42, said the ECB would reduce the pace of its emergency stimulus from next quarter, while 17 said it would maintain its current “significantly higher” pace, while none predicted a further acceleration.

The median of 33 forecasts showed the ECB was expected to buy 70 billion euros worth of bonds under its PEPP from the current 80 billion euros per month target starting next quarter.

The ECB’s emergency stimulus was expected to end completely by March as scheduled, according to responses to an additional question in the Aug. 30-Sept. 2 poll.

But over 70% of economists, 29 of 40, said it would take more than two years for the ECB to completely end all asset purchases, including six predicting more than five years. While three said “never”, half of the respondents said the ECB would be finished within five years.

Bond purchases under its main over-6-year-old Asset Purchase Programme (APP) currently amount to 20 billion euros a month.

“The euro zone is going in the same direction as Japan. We don’t think they will get to a point where they can raise interest rates or stop asset purchases within our forecast horizon,” said Andrew Kenningham, chief Europe economist at Capital Economics.

“Japan has been doing QE for most of the last 20 years, so it’s perfectly possible the ECB could do it for 20 years too. We’ve just got to stop thinking of it as highly unusual.”

The central bank was expected to keep its key interest rates on hold through to end-2023 at least, with the deposit rate unchanged at -0.5% and its refinancing rate at zero.

That was despite economists having robust growth forecasts for this year and next. Around two-thirds of euro zone residents have received at least one coronavirus vaccine shot and policymakers noted the Delta variant of COVID-19 would have only a limited impact on the economy.

Inflation was forecast to average 2.1% this year and slow to 1.6% next.

On a quarterly basis, inflation was predicted to rise and average 2.6% and 3.0% in the current quarter and next, respectively. It was seen falling next year, dropping to average 1.4% in Q4 2022.

The ECB was expected to publish its own growth and inflation projections at its Sept. 9 meeting.

“The current inflation trend is transitory in nature. However, there is a risk that inflation will persist longer than expected,” said Bas van Geffen, senior macro strategist at Rabobank.

“This may be caused by lingering supply chain issues. These issues will, however, work themselves out eventually. Sustained high inflation is set to erode consumer spending power…(but) maybe wages won’t be able to catch up with higher inflation either.”

Global factory activity lost momentum in August as the ongoing pandemic disrupted supply chains, surveys showed on Wednesday, with many firms reporting logistical troubles, product shortages and a labour crunch.

But the euro zone jobless rate, which fell to 7.6% in July from 7.8% in June, was forecast to reach its pre-pandemic 7.4% rate in 2023.

“Europe is inherently a high unemployment region and some countries in particular – very high levels of unemployment compared to the UK or the U.S. or Japan,” said Capital Economics’ Kenningham.

“But in its own terms compared to its own historical performance, it is not too bad at the moment. I think it’s more likely to continue to fall gradually over the next year or two.”

(For other stories from the Reuters global long-term economic outlook polls package)

(Reporting by Shrutee Sarkar and Swathi Nair, Polling by Devayani Sathyan and Vijayalakshmi Srinivasan; Editing by Ross Finley and Mark Heinrich)

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