Talk now, act later: Five questions for the ECB

By Dhara Ranasinghe and Saikat Chatterjee

LONDON – European Central Bank officials are back from their summer break and with the hawks pushing for a slowdown in bond buying, Thursday’s meeting could prove a key market event.

Chief economist ECB-POLICY-LANE-00602025-2d60-4b66-bf90-96ec7c848621>Philip Lane believes it’s too early for the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB to lay out plans to wind down the 1.85 trillion euro ($2.2 trillion) Pandemic Emergency Purchase Programme (PEPP).

But this week the central bank should set the pace of PEPP buying for the final quarter of the year, a decision that has taken on greater significance given the taper talk.

“The most likely outcome — and smartest thing to do — is still to do nothing,” said Pictet Wealth Management strategist Frederik Ducrozet.

Here are five key themes on the market’s radar.

1. Will the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB change the pace of its PEPP bond buys?

The ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB has kept PEPP bond purchases at a “significantly higher” pace since March to support a COVID-hit economy.

While some adjustment is possible, Lane has argued it would be at the margins so the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB can maintain “favourable financing conditions”.

Piet Haines Christiansen, chief strategist at Danske Bank, reckons the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB will cut bond-buying to January-February levels of 60 billions euros a month from the current pace of 80 billion euros. Removing a reference to ‘significantly higher’ would be “an elegant way” for the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB to communicate the slowdown, he said.

Still, the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB is likely to stress that it has the flexibility to ramp up buying if needed and that any slowdown is not a taper.

For a graphic on PEPP:

https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwwbjjvo/PEPP.JPG

2. When will the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB start discussing life after PEPP?

With the economy rebounding, policymakers such as Austria’s Robert Holzmann say now is the time to discuss how to end the PEPP, which runs until March.

ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB doves will likely push back. Lane argues that markets won’t need much notice as the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB will continue buying bonds via another scheme to meet its 2% inflation goal.

Many economists reckon December is the most likely timing for the post-PEPP debate.

“It’s too early to talk about this (taper) when the Delta (COVID-19) variant is still a concern,” said Eric Vanraes, a portfolio manager at Eric Sturdza Investments. Waiting until Decemeber and after the November U.S. Federal Reserve meeting would make the most sense, he said.

For a graphic on APP:

https://fingfx.thomsonreuters.com/gfx/mkt/akpezzleavr/APP.JPG

3. What are headwinds to the long-term growth outlook?

The ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB publishes its latest forecasts on Thursday and Vice President Luis de Guindos has flagged upward revisions to growth estimates.

The economy has held up well despite the spread of the Delta variant, thanks in part to the European Union hitting its target of fully vaccinating 70% of its adult population.

But the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB may be pressed on what the uncertainty posed by other COVID-19 variants means for the outlook, as well as signs global growth is peaking.

For a graphic on COVID:

https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnnxjlvq/COVID.JPG

4. If inflation is at 10-year high, are price pressures still transitory?

Euro area inflation rose to 3% in August, challenging the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB’s view that rising price pressures are driven by one-off temporary factors.

Expect the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB and chief Christine Lagarde to stick with this view and stress that inflation will likely languish below target in coming years.

But supply bottlenecks linked to the pandemic have lasted longer than anticipated and business surveys suggest costs for factories are rising. Then again, wage pressures – a key focus for the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB – remain subdued.

For a graphic on PMI:

https://fingfx.thomsonreuters.com/gfx/mkt/egvbkkgjlpq/PMI.JPG

5. What would a disorderly market reaction to a Fed taper mean for the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB?

Expectations for the Fed to slim its bond buying have risen since the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB last met; Norway and New Zealand are preparing to hike interest rates.

The ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB will likely be among the last to exit pandemic-era stimulus, but policymakers will be watching how markets react to any Fed taper.

After all, officials were alarmed early this year when expectations for a strong U.S. recovery sparked a jump in Treasury yields that pulled euro zone borrowing costs higher.

For a graphic on taper:

https://fingfx.thomsonreuters.com/gfx/mkt/klvykkrqbvg/taper.JPG

(Reporting by Dhara Ranasinghe; Graphics by Saikat Chatterjee; Editing by Tommy Wilkes and Toby Chopra)

By Dhara Ranasinghe and Saikat Chatterjee

LONDON – European Central Bank officials are back from their summer break and with the hawks pushing for a slowdown in bond buying, Thursday’s meeting could prove a key market event.

Chief economist ECB-POLICY-LANE-00602025-2d60-4b66-bf90-96ec7c848621>Philip Lane believes it’s too early for the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB to lay out plans to wind down the 1.85 trillion euro ($2.2 trillion) Pandemic Emergency Purchase Programme (PEPP).

But this week the central bank should set the pace of PEPP buying for the final quarter of the year, a decision that has taken on greater significance given the taper talk.

“The most likely outcome — and smartest thing to do — is still to do nothing,” said Pictet Wealth Management strategist Frederik Ducrozet.

Here are five key themes on the market’s radar.

1. Will the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB change the pace of its PEPP bond buys?

The ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB has kept PEPP bond purchases at a “significantly higher” pace since March to support a COVID-hit economy.

While some adjustment is possible, Lane has argued it would be at the margins so the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB can maintain “favourable financing conditions”.

Piet Haines Christiansen, chief strategist at Danske Bank, reckons the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB will cut bond-buying to January-February levels of 60 billions euros a month from the current pace of 80 billion euros. Removing a reference to ‘significantly higher’ would be “an elegant way” for the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB to communicate the slowdown, he said.

Still, the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB is likely to stress that it has the flexibility to ramp up buying if needed and that any slowdown is not a taper.

For a graphic on PEPP:

https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwwbjjvo/PEPP.JPG

2. When will the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB start discussing life after PEPP?

With the economy rebounding, policymakers such as Austria’s Robert Holzmann say now is the time to discuss how to end the PEPP, which runs until March.

ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB doves will likely push back. Lane argues that markets won’t need much notice as the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB will continue buying bonds via another scheme to meet its 2% inflation goal.

Many economists reckon December is the most likely timing for the post-PEPP debate.

“It’s too early to talk about this (taper) when the Delta (COVID-19) variant is still a concern,” said Eric Vanraes, a portfolio manager at Eric Sturdza Investments. Waiting until Decemeber and after the November U.S. Federal Reserve meeting would make the most sense, he said.

For a graphic on APP:

https://fingfx.thomsonreuters.com/gfx/mkt/akpezzleavr/APP.JPG

3. What are headwinds to the long-term growth outlook?

The ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB publishes its latest forecasts on Thursday and Vice President Luis de Guindos has flagged upward revisions to growth estimates.

The economy has held up well despite the spread of the Delta variant, thanks in part to the European Union hitting its target of fully vaccinating 70% of its adult population.

But the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB may be pressed on what the uncertainty posed by other COVID-19 variants means for the outlook, as well as signs global growth is peaking.

For a graphic on COVID:

https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnnxjlvq/COVID.JPG

4. If inflation is at 10-year high, are price pressures still transitory?

Euro area inflation rose to 3% in August, challenging the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB’s view that rising price pressures are driven by one-off temporary factors.

Expect the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB and chief Christine Lagarde to stick with this view and stress that inflation will likely languish below target in coming years.

But supply bottlenecks linked to the pandemic have lasted longer than anticipated and business surveys suggest costs for factories are rising. Then again, wage pressures – a key focus for the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB – remain subdued.

For a graphic on PMI:

https://fingfx.thomsonreuters.com/gfx/mkt/egvbkkgjlpq/PMI.JPG

5. What would a disorderly market reaction to a Fed taper mean for the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB?

Expectations for the Fed to slim its bond buying have risen since the ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB last met; Norway and New Zealand are preparing to hike interest rates.

The ECB-POLICY-CENTENO-a52f21b9-8975-4dc5-9a21-8c5e8267aa43>ECB will likely be among the last to exit pandemic-era stimulus, but policymakers will be watching how markets react to any Fed taper.

After all, officials were alarmed early this year when expectations for a strong U.S. recovery sparked a jump in Treasury yields that pulled euro zone borrowing costs higher.

For a graphic on taper:

https://fingfx.thomsonreuters.com/gfx/mkt/klvykkrqbvg/taper.JPG

(Reporting by Dhara Ranasinghe; Graphics by Saikat Chatterjee; Editing by Tommy Wilkes and Toby Chopra)