It’s time for the European Central Bank to discuss scaling down


Coronavirus economic impact update

Like employers, governments, and health services, central bankers have to resolve the question of what “normal” will look like after a pandemic. For the European Central Bank, which announced its latest policy decision on Thursday, the answer is crucial in deciding how quickly and how far to reduce the scale of additional asset purchases when the pandemic begins.Like its counterparts in the Federal Reserve and the Bank of England, it is time for the central bank to act Formulate a final exit strategy.

In its Own words, The European Central Bank’s pandemic emergency purchase plan is a bond purchase plan designed to last until the end of the “crisis phase” of the pandemic judged by the management committee. Due to the high vaccination rate in the European Union and the reduction in the spread and lethality of the coronavirus, it is difficult to say that the crisis phase has at least not subsided. A decade of high inflation and strong growth data have added to the argument that the special circumstances that supported the central bank’s existing stimulus measures are now disappearing.

Unlike the Federal Reserve, the European Central Bank’s PEPP program aims to purchase total purchases—expanded to 1.85 tons in December last year—not Monthly bond purchase rate. This means that there is always an end date. By the end of July, about 13 trillion euros have been purchased, and the current purchase rate is about 60 to 70 billion euros. The plan will end in March next year, its second anniversary.

However, since the virus is unlikely to disappear completely and the economy is still recovering from the shutdown, some additional support may still be needed to return to pre-crisis levels.this The Fed’s dilemma on the issue of “shrinking” Due to the spread of the more contagious Delta variant in the United States, its own asset purchases have become complicated, slowing the pace of recovery. Higher vaccination rates in Europe mean fewer problems, but there will still be some restrictions and voluntary social distancing.

The outlook remains uncertain, and the recovery is yet to be determined. The high growth and inflation data partially reflect the impact of the shutdown last year on the data, rather than the potential intensity of demand. Monthly inflation data indicate that the rate of price growth has slowed. Earlier this year, the central bank also adopted a more moderate approach to its inflation target, which is contrary to the return of monetary policy to the status quo before the coronavirus outbreak.

Nonetheless, market behavior shows that the central bank can signal that it intends to reduce the scale of purchases without causing financial conditions to tighten. Government bond spreads — the difference in interest rates charged by investors, such as Germany and Italy — are still small. Similarly, the actual yield on junk bonds denominated in euros this week became negative for the first time. Below headline inflation, And the Stoxx 600 stock index across Europe reached Set new highs in recent weeksTherefore, the slight correction in central bank asset purchases will match the improvement in investor risk appetite.

At the Thursday meeting, the central bank needs to clearly and credibly explain how its plan to reduce PEPP and whether it will expand existing monetary stimulus measures to compensate for the end of the plan. It’s too early to actually start scaling down, but being clear about how to plan to do so will make the final transition easier.



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