The ECB July meeting was all about revising the forward guidance on rates. Meanwhile, the debate on what to do with the bond purchases will be ahead in the September meeting. The European Central Bank sees that upside risks to inflation have increased, economists at Nordea report.
Rising inflation risks
“Upside risks to inflation had increased. However, the price outlook remained some distance from the ECB’s target level.”
“It is likely too early for the ECB to conclude that the coronavirus crisis phase is nearing its end at the September meeting. As a result, December now looks a likelier time to decide when the Pandemic Emergency Purchase Programme (PEPP), or more specifically net bond purchases under that programme, should end.”
“The pace of the bond purchases will be reviewed at the September meeting, and it is not out of the question that the central bank would decide to return to the buying pace prevailing early this year, before the ECB pledged to increase the pace significantly. Chief Economist Lane certainly left such an option open in his comments yesterday.”
“If favourable financing conditions can be maintained with lower purchases, the ECB will buy less. With e.g. longer real rates at new lows, the hawks can certainly make the argument of returning to a lower pace of purchases.”
“We continue to think that the ECB will stick with the current EUR1850 B PEPP envelope, which still has plenty of firepower left; enough to taper the purchases only during the first half of 2022.”
“The ECB’s continued support will limit the upside for bond yields, and given that the Fed is set to proceed faster in removing exceptional stimulus, we see plenty more downside for the EUR/USD.”