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ECB to taper pandemic buys after Sept, COVID-19 variants top risk

The European Central Bank will start tapering its pandemic-related asset purchases after its September meeting and stop buying them by the end of March, according to a Reuters poll which showed the top economic risk was new COVID-19 variants.

After announcing a new strategy last week that allows the central bank to tolerate inflation higher than its new 2% symmetric target, ECB President Christine Lagarde said on Monday the bank would change its policy guidance at its July 22 meeting.

While those announcements came against a backdrop of slightly more optimistic growth and inflation forecasts for this year and next, high unemployment rates in most euro zone countries are underscoring the need for caution.

Just over 70% of economists, or 36 of 51, who responded to an additional question in the July 5-12 poll said the ECB would start tapering its Pandemic Emergency Purchase Programme (PEPP) after the September meeting, up from nearly 63% last month.

All of the 1.85 trillion euro PEPP envelope would be used up, according to the consensus view of 39 economists, with the lowest expectation pencilled in at 1.5 trillion euros.

“Judging from the current monthly pace of purchases, our assumption of only a gradual reduction of this pace after September, and in the remaining time until March, the envelope will likely be used in full,” said Salomon Fiedler, European economist at Berenberg.

“Furthermore, by September, the vaccination campaign in Europe should be all but complete … but if new variants are able to circumvent protection from current vaccines, renewed social distancing would once again put a damper on the economy.”

The poll of over 100 economists showed the euro zone economy would expand an average 4.5% this year and 4.3% next, up from 4.2% predicted for both years last month.

That compared to the European Commission’s more optimistic projections of 4.8% growth for this year and 4.5% next, faster than the 4.3% and 4.4% expansion it had forecast in May.

While the latest poll consensus for this year was the highest since January, growth expectations for 2022 were the highest since polling began for that period in July 2020.

After probably having expanded 1.4% last quarter, the bloc’s economy was forecast to grow 2.4% and 1.3% in Q3 and Q4, respectively, up from 2.3% and 1.2% predicted in June.

Annual growth forecasts for Germany, France and Italy were also upgraded to 3.5%, 5.7% and 4.8% this year on average from 3.2%, 5.4% and 4.1% predicted in an April poll.

While inflation in the single currency bloc was expected to rise and average above target in the second half of 2021, for the full year it was forecast to average 1.9% this year and slow to 1.4% next.

The ECB was expected to keep its deposit rate unchanged at -0.50% and refinancing rate at zero through to the end of next year.

Nearly 90% of economists, or 53 of 60, who answered another question said new COVID-19 variants were the biggest risk to the euro zone economy this year. The remaining seven respondents said a slower economic growth rate would be the top risk.

None picked higher inflation or ECB tapering as a risk.

“COVID-19 remains the biggest unknown, and with potentially the biggest negative impact. It seems unlikely that economic growth will slow substantially in the second half of the year, unless we see a resurgence of the coronavirus,” said Bas van Geffen, quantitative analyst in macro strategy at Rabobank.

“Meanwhile, it is true inflation will be high this year, but we believe this to be a temporary factor. And the ECB is looking through this, while also keeping a close eye on financial conditions, so I don’t think they will move at such a speed that a reduction of ECB easing will pose a significant risk.”
Source: Reuters (Reporting by Swathi Nair and Shrutee Sarkar; Polling by Indradip Ghosh, Prerana Bhat and Susobhan Sarkar; Editing by Rahul Karunakar and Catherine Evans)

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