Fra ABNamro:
ECB Preview: Signal of slower PEPP purchases, but wind down announcement not till December – This week’s Governing Council meeting will see the ECB give guidance on the pace of net purchases under the PEPP for the coming quarter, while it will also publish its new projections on the economic outlook. We judge that an announcement about whether the PEPP will end in March 2022 and the shape of the APP going forward will likely wait until the December meeting.
The ECB stepped up the pace of net purchases under the PEPP in Q2 and the current quarter. The ECB communicated that it would conduct purchases at a ‘significantly higher pace than during the first months of the year’ based on a ‘joint assessment of financing conditions and the inflation outlook’. While the medium term inflation outlook has not changed, the ECB might be more comfortable with financing conditions. The weighted sovereign nominal 10y yield has come down, while given the rise in inflation expectations, real rates have dropped significantly. We therefore expect the ECB to signal a slower pace of purchases in Q4 compared to Q2 & Q3. It could do this by signalling it will target purchases at levels that are consistent with those seen in the first months of the year, or perhaps just dropping the ‘significantly’ from its current guidance. At the same time, the ECB is likely to emphasise that the PEPP is still running and that it maintains the full flexibility to change the pace and/or size going forward.
At the December meeting, we expect the ECB to announce that the PEPP will indeed end in March of next year. The condition to end the programme has been stated as ‘the coronavirus crisis phase (being) over’. It has not been explicit about what this means, but some officials have suggested that the level of GDP would need to return to pre-corona levels, which would likely be met in the last quarter of this year (see below). In addition, progress with the vaccine roll-out and the more sustained opening up of economies should also encourage the Governing Council. We think that any negative market impact of the PEPP wind down will be cushioned by the continued accommodative policy with respect to the APP and guidance on policy rates.
Indeed, any announcement on the ending of the PEPP will likely be coupled with changes to making the APP a suitable replacement. It is clear that the APP will continue for long after the PEPP ends, but the ECB still needs to review its guidance on this point. The ECB could keep the current format of a set specific amount of monthly purchases until some inflation criteria are met, but perhaps at a higher monthly pace (say EUR 30bn rather than 20bn).
However, it could also opt for more flexibility, by announcing an end to the fixed monthly amount, which would be replaced by an envelope that could be allocated based on circumstances over a fixed period. Meanwhile, the ECB’s new guidance on policy rates coupled with the weak medium term inflation outlook implies in our view that rates will remain on hold through 2024.
New forecasts for growth and inflation: 2021 higher, but 2022 probably lower– The ECB will also publish its September Staff Macroeconomic Projections. The central bank’s forecast for GDP growth and inflation in 2021 will probably be revised higher. This is the result of the recently published data coming in higher the central bank had expected a quarter ago, and revisions to the past GDP data. Indeed, 2021Q2 GDP growth came in higher than the ECB had projected (2.0% versus 1.4%), while the quarterly growth figures for 2020 and 2021Q1 were revised up on balance. However, the central bank will probably revise its forecast for Q3 growth (of 2.8% qoq) lower as the positive growth surprise in Q2 mainly resulted from economies moving out of lockdown faster and earlier than was expected. As a result, the ECB’s projections for annual 2021 GDP growth (currently 4.6%) will probably rise moderately, whereas its forecasts for 2022 (4.7%) will probably decline by around 0.2-0.3pps. The forecast for 2023 (2.1%) will probably be roughly unchanged. Given these changes, GDP would return to pre-pandemic levels in the final quarter of this year in the ECB’s scenario. Despite the stunning growth numbers in 2021-2022, the level of GDP would still be significantly below the trend level at the end of 2022. According to the ECB’s current quarterly growth forecasts for 2023, the level of GDP would also remain below the trend level at the end of 2023, implying that economic slack will remain for a considerably time.
Turning to inflation, the ECB’s forecast for HICP inflation in 2021 (currently 1.9%) will probably be revised higher, likely to a little above 2%. This is mainly due to energy price inflation jumping higher than had been expected. This also means that the forecast for HICP inflation in 2022 (currently 1.5%) could become slightly lower as base effect of the jump in energy prices in 2021, will work in the opposite direction in 2022. We do not expect a major revision for HICP inflation in 2023 (currently 1.4%).
Finally, the ECB’s forecast for core inflation (HICP minus food and energy) in 2021-2023 (of 1.1%, 1.3% and 1.4%, respectively) will probably remain largely unchanged. On the one hand the central bank could project some of the recent rise in energy and other commodity prices filtering through into core inflation in the coming years. On the other hand, wage growth is turning out significantly lower than the ECB currently projects, due to the large amount of slack in the labour market. The central bank expects compensation per employee to rise by 2.9% in 2022 and 2.4% in 2023, which seems high considering that growth in negotiated wages has slowed from a peak of 2.6% in 2019Q3, down to 1.7% in 2021Q2. (Aline Schuiling & Nick Kounis)
