ECB: from words to deeds – EconomyMorning



The central bank has decided to increase its monthly purchases on government bonds to ensure that financial conditions remain accommodative. This decision logically comes after the statements of Madame Lagarde and Monsieur Lane which pointed to the risks associated with the latest rapid rate hikes on the bond markets. The bond markets welcomed this decision and European rates eased during the session. Madame Lagarde does not know how to pronounce on the amounts at stake by referring to the next weekly statistics to judge the extent of the action of the central bank. A strong and lasting increase would then reduce the total envelope rather than expected. The bank’s economic scenario remains cautious by mentioning the risks that remain in the short term linked to the pandemic and the low rate of vaccination. The bank expects the economy to accelerate in the second half of the year and has revised up its growth expectations for 2021 to 4% (against 3.9%) as well as that of inflation from 1% to 1.5%. Expected growth for 2022, as well as inflation, remains moderate at just 4.1% and 1.2% respectively. This scenario remains weaker than the consensus expectations for 2021. The bank recalled that it did not believe in a lasting rise in inflation and believes that the increase in 2021 will remain temporary. Medium-term inflation forecasts therefore remain below the 2% inflation target, which would imply a still accommodative monetary policy well beyond the end of the PEPP scheduled for March 2022. Despite the adjustment on monthly purchases, The bank reaffirmed the symmetry around the amounts of the PEPP, which can be increased as needed or not be used in full if conditions improve significantly. While the market expects full use of PEPP, maintaining this symmetry could be indicative of differences within the Governing Council over full use of PEPP. Moreover, if the communication tried to clarify the definition of the financial conditions used by the bank as an indicator of its monetary policy, the gap between the relatively favorable conditions on the markets and the first signs of a tightening of the credit supply of banks remained without further explanation, while it threatens the ultimate effectiveness of this monetary stimulus policy.