By Dhara Ranasinghe and Saikat Chatterjee

LONDON, (Reuters) – Thursday’s European Central Bank meeting appears to be a critical one – official are ready to end the pandemic-triggered stimulation. It is now up to the officials of the European Central Bank to decide how much stimulus they will withdraw, given the Omicron COVID-19 version and high inflation.

These are the five most important questions for market analysts.

1. What are our expectations for Thursday?

It is expected that the ECB confirms that the Pandemic Emergency Purchase Programme, (PEPP), worth 1.85 trillion Euros ($2.09 trillion), was terminated next March. This programme was initiated in March 2020 during the worst of COVID-19-induced turmoil on the market.

The report will also indicate that bond purchases are likely to slow down in the first quarter 2022.

According to the ECB, it plans to reinvest maturing bonds in PEPP funds back into market until at least 2023. The ECB could still extend the scheme in the event of adverse conditions.

Christine Lagarde (ECB President) stated that the policy period may not be extended due to renewed uncertainty.

BNP Paribas’ chief global economist Luigi Speranza stated that “it is a delicate time, and the ECB must make an important decision about asset purchases. There are shocks which go in both direction.” (Graphic: Weekly PEEPP, https://fingfx.thomsonreuters.com/gfx/mkt/movanqqbkpa/Weekly%20PEPP.JPG)

2. Is the Asset Purchase programme (APP), going to pick up the slack after the PEPP ceases?

The six-year-old APP’s monthly bond purchases by the ECB of 20 billion euros are set to increase to double in April. This will stabilize long-term inflation at 2% and replace most of the PEPP stimulus.

The decision was not unanimous. The ECB hawks advise against adding to APP if inflation continues to rise over the longer term. The Doves favor a strict monetary policy that is easy because the long-term price pressures will remain low.

A source-based report indicates that a compromise has been reached regarding beefing up APP, but with limitations on how large and long the commitment must be kept.

With the condition that it not be used all, the ECB might approve a purchase order until 2022. Alternativly, the ECB could approve bond buys for shorter periods with the condition that purchase would not cease after this time, although purchases would likely stop.

Piet Haines Christianen, chief strategy officer at Danske Bank, stated that “there are lots of moving pieces” and noted that ECB hawks could favor an APP envelope due to its limited volume and duration. (Graphic: APP Program, https://fingfx.thomsonreuters.com/gfx/mkt/zdvxoxxjrpx/APP%20Program.JPG)

3. Is inflation considered transitory by the ECB?

Jerome Powell, chief of the U.S Federal Reserve, says that “transitory”, a term used to describe rising inflation is incorrect.

Lagarde is likely to press on this trajectory, with eurozone inflation hovering at record 4.9%. The profile was described by Lagarde as a “hump,” and she added that “eventually a hump declines.”

Thursday’s ECB Economic Forecasts will show that inflation in consumer prices is expected to be around 1.8% in 2024, according to the forecasts.

Important is how high inflation affects wages and whether it raises longer-term prices.

Luis de Guindos (ECB Vice President) stated that although inflation is expected to slow down, there has been no evidence of higher wages. (Graphic: EZ inflation, https://fingfx.thomsonreuters.com/gfx/mkt/gdvzymmjmpw/EZ%20inflation.JPG)

4. What does Omicron refer to in terms of the economic outlook

Omicron can exacerbate supply chain bottlenecks, and central banks want to know how it impacts economic activity with new restrictions.

Lagarde thinks Europe has fared well under the pandemic. Economists agree that Omicron doesn’t have a significant impact on the economy. (Graphic: COVID And europe, https://fingfx.thomsonreuters.com/gfx/mkt/znpnexxqkvl/COVID%20And%20europe.JPG)

5. What degree of flexibility can the ECB afford itself after PEPP?

It will be important for bond markets to understand how much of the flexibility contained in PEPP will be transferred into APP. This is even if some decisions may be delayed.

Many analysts don’t believe the ECB will raise the issuer limit or remove the capital key from APP as it did with its pandemic plan. Legal objections might result.

Greece might be a candidate. Greece’s bonds are not included in PEPP. However, they are included in APP. APP requires a high investment grade rating. Greece is lacking this rating. The ECB could stress that Greek bonds would be supported because PEPP bond redemptions are being reinvested. (Graphic: Europe bond spreads, https://fingfx.thomsonreuters.com/gfx/mkt/jnvweaakjvw/Europe%20bond%20spreads.JPG)