The ECB Governing Council has collectively decided that recent developments in government bond markets are inconsistent with it achieving its inflation goal.

In the press statement it noted that ‘based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year’.

The latest weekly PEPP net purchase number stood at EUR 11.9bn, while the average so far this year is EUR 12.3bn. This compares to weekly averages of roughly EUR 25-30bn at the height of the crisis, so there seems to be considerable room for the ECB to step up purchases. The exact size of the step up over time will depend on the ECB’s success in curbing bond yields.

Overall, it is clear that the ECB has now drawn a line in the sand in terms of curve steepening. This is an important signal as the central bank has significant firepower in terms of net asset purchases.

In addition, it has other tools it can use. Most importantly, the ECB can enhance its forward guidance to reign in market rate hike expectations. It could do this indirectly by signaling an even longer period of net asset purchases under the PEPP. This could be a credible signal that the deposit rate will remain on hold for longer than markets were pricing in, given that the policy rate will not go up before asset purchases end.

Furthermore, the ECB could add date-based guidance to its current state based guidance. For instance, it could set out exactly when the Governing Council expects that inflation would converge to the target and be reflected in underlying inflation dynamics given current projections.