ECB begins cautious taper while holding rates

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ECB begins cautious taper while holding rates

The European Central Bank has begun withdrawing its €70bn Pandemic Emergency Purchase Programme (PEPP), reducing it in the first quarter of next year and ending it by March 2022.

While the central bank will begin tapering, much of the impact will be offset by doubling the Asset Purchase Programme (APP) to €40bn in Q2 next year, due to increasing uncertainty around the omicron variant. This will be reduced to €30bn in Q3 and return to the current €20bn in Q4.

Furthermore, the reinvestments from PEPP will continue until at least the end of 2024 and could be restarted at any time if deemed necessary.

Carsten Brzeski, chief economist for ING Germany, said on Twitter that while the decisions today were rather dovish, "inflation projections and risk assessment are rather hawkish".

"Take any ECB forward guidance with a huge pinch of salt," he added.

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Interest rates remain on hold, which was expected, with Paul Craig, portfolio manager at Quilter Investors stating that "rate increases were clearly never on the table".

Konstantin Veit, portfolio manager at PIMCO said that "while we expect a gradual reduction in the pace of net asset purchases over time as the pandemic situation improves, it remains less likely that the ECB will end quantitative easing and raise policy rates in the foreseeable future".

Paul Craig, portfolio manager at Quilter Investors agreed, stating that "with such a broad array of inflation views on the governing council we expect it will be some time before rate hikes are on the table in the Euro Area."

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The bank cut its 2022 GDP growth forecast to 4.2% from 4.6% and raised its 2022 inflation forecast to 3.2% from 1.7% previously.

Craig said that "the wind-down of asset purchases had to be confirmed from the current position which, in our view, is distorting financial markets. Should virus fears recede, 2022 looks set to be a decent year for the bloc economically speaking and as such it is in a good position to begin to scale back the extraordinary support."

Veit was also optimistic, stating that "we believe the chances for the Euro area encountering a medium to longer term inflation problem are modest, particularly compared to jurisdictions where fiscal policy is traditionally less constrained in taking private sector behaviour into account".