Swathi Nair

BENGALURU – According to a Reuters poll, the European Central Bank plans to halve monthly asset purchases beginning in April. The survey of ECB watchers found that a reprieve of high euro zone inflation by 2022 would mean an increase in interest rates.

Policymakers at the Dec. 16 Governing Council meeting https://www.reuters.com/markets/rates-bonds/exclusive-ecb-governors-home-temporary-limited-bond-purchase-boost-sources-2021-12-09 will debate options on how to adapt the bank’s regular asset purchase programme (APP) once a much larger pandemic-fighting scheme ends in March.

According to the survey, the growth prospects for the Euro Zone were relatively consistent. Most respondents cited the spreading of coronavirus varieties, and not persistent inflation, as their biggest economic risk next year.

The risk of variants being a global problem is not the only concern. However, the ECB’s response differs from those of its U.S. counterparts and the UK counterparts. They are likely to increase interest rates by almost zero in 2022 – possibly even as early as February for the Bank of England.

The ECB has stipulated a rate hike “shortly after” bond purchases end and so is forecast to keep its key interest rates on hold through to end-2023 at least, with the deposit rate at -0.50% and its refinancing rate at zero – in sharp contrast to recent market expectations, now abandoned, for late 2022.

Fabio Balboni (HSBC senior economist) stated that he believes that the conditions for a rate lift-off should have been met by 2023. Given the strict sequence between QE and the initial rate rise, it might be the time when the ECB will announce the end to APP (Asset Purchase Programme). Perhaps with a brief taper.”

The ECB buys 80 billion Euros of bonds every month under two programs: 60 million under the Pandemic Emergency Purchase Programme(PEPP) which is due to end March and 20 under APP.

A Reuters poll conducted Dec. 8-10 found that the central banking will keep buying bonds worth 40 billion euros per month from April through next year. Others forecast that the ECB would continue its purchases through mid-2023.

According to 21 forecasts, the median was 20 billion euro. The total of the top-ups for 40 billion euros were also shown.

However, 13 respondents from a smaller group of 20, who answered an additional question, said that if the ECB approved an APP hike, it would provide an envelope for a longer time. Rest of the respondents said that it would be in monthly volume.

Bas van Geffen (senior macro strategist, Rabobank) stated that the ECB would commit to net APP purchase purchases up to at least 2022. However, the Council could decide not to commit to the monthly 40 billion euro pace for the whole year.

Van Geffen, like many economists, said that the APP could continue to run into the next year.

About 70% (or 18 of 26) who answered an additional question stated that the APP would be finished by the end-2023. Sixteen said they expected it to finish in Q4 2024 while three others said it would conclude by 2020.

The consensus forecasts of eurozone inflation rose for the sixth consecutive month, according to a poll. This will allow it to surpass the 2% goal set by European Central Bank through Q3 next year.

Peter Vanden Houte (chief economist at ING) stated, “Inflation was overshooting” and that the medium term inflation outlook had become a bit less uncertain due to risks skewed towards the upside.

According to the forecast, inflation will average between 4.4% and 3.5% in this quarter as well as next. It reached its highest point of 5.9% in November. This compares to the 4.1% and 3.1% polled last month.

After rising at the same pace this year, it is expected to increase by 2.5% in average next year. This compares with 2.2% and 2.4% forecasted in November. These numbers are significantly higher than the ECB’s most recent projections of 1.7% & 2.2% respectively.

It was forecast that the economy would grow by 0.6% in this quarter, and 0.7% next. This is a slightly lower estimate than 0.8% for each period a month ago. According to the poll, it was projected to grow at 4.2% next year. That is unchanged from previous month. In 2023, it will increase to 2.3%, an increase of 2.1%.

Around 60% of the 31 respondents said that the greatest downside to the euro area economy in the next year was due to new coronavirus varieties. Eleven respondents stated persistent inflation while two others claimed extreme fiscal tightening as well as higher energy prices.

(For more stories, see the Reuters Global Long-Term Economic Outlook Polls Package)

(Polling done by Sujith Pai, Milounee Purohit and Swathi Naair. Editing by Ross Finley and Mark John.