ECB to rein in Covid stimulus measures but promises to maintain support

The European Central Bank announced today it will start reining in the wave of stimulus measures it unleashed in response to the Covid crisis, becoming the first of the world’s big three central banks to do so.

The ECB said the Eurozone economy’s rapid economic recovery from the Covid crisis has engineered favourable financing conditions, enabling the central bank to dial back the scale of its bond purchases.

“The Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the Pandemic Emergency Purchase Programme than in the previous two quarters,” the ECB said in a statement.

The move tapers the ECB’s €1.85trn Covid PEPP programme, which was launched to support growth, keep rates low and financing conditions favourable after Covid hit the Eurozone economy last year. The central bank currently buys €80bn of bonds each month.

The central bank promised to continue to buy bonds and intervene if financing conditions tighten significantly.

The central bank did not provide details breaking down when and how the tapering would happen. The ECB held rates at record lows.

Experts said the move was unusual given rich economies’ central banks tend to take their cue from the US Federal Reserve, which recently signalled it will shrink its asset purchases programme this year only if full employment is achieved.

Hinesh Patel, portfolio manager at Quilter Investors, said: “It may be small but it is noteworthy that the European Central Bank has beaten the Federal Reserve to the punch and is tapering its support first.”

“It was thought developed economies would wait for the Fed to move first and react accordingly, but these are not normal times for monetary policy.”

The Bank of England recently provided guidance on when it would dial back asset purchases, saying it will not reinvest the proceeds of its holdings once rates hit 0.5 per cent and would start reducing its balance sheet when rates reach 1.5 per cent.

However, Andrew Bailey, governor of the Bank, said at a Treasury Committee hearing yesterday he thought conditions to tighten monetary policy had been met at the Old Lady’s latest round of ratesetting meetings in August.

Joe Little, chief global strategist at HSBC Asset Management, said: “With the ECB in no rush to significantly tighten policy, the recovery in the eurozone is set to continue amid high levels of vaccination, substantial savings piles, and the release of EU recovery funds.”

The ECB upped its forecasts for inflation and Eurozone economic growth, up to 2.2 per cent and five per cent respectively.