ECB compromise on bond-buying might be brokered by summer lull

BRUSSELS: One way out of the European Central Bank’s (ECB) dilemma about whether to slow pandemic bond-buying next quarter leads down a path policy makers have followed ever since quantitative easing started in 2015.

Thin liquidity in the summer months has prompted the ECB to reduce the pace of purchases each year, including during the pandemic. This technical necessity – the central bank risks overwhelming the market otherwise – might help President Christine Lagarde negotiate a compromise in what will be a heated debate at the Governing Council’s June meeting.

Ever since a decision in March to temporarily step up bond buying to ensure yields and credit rates remain low across the 19-nation eurozone, some policy makers have argued that a strong economic rebound from lockdowns and an improving inflation outlook will allow the ECB to reverse course in the third quarter.

Others prefer a more cautious approach, suggesting they’re open to even expanding the €1.85 trillion (US$2.2 trillion or RM9 trillion) programme.

Both sides might be able to agree on reaffirming the ECB’S commitment to keep financing conditions favourable, while citing the market lull should they buy less.

Policy makers have already shown during this year’s Easter holidays – purchases declined just after the commitment to boost them – that they’re not too concerned about temporary disruptions to their plans.

“They could agree to something more flexible – adjusting the purchases gradually lower over the summer months,” said Jan von Gerich, chief strategist at Nordea Bank Abp.

“Communication-wise though, it might be a challenge, since the recovery is unlikely to be on a solid foundation yet at the time of the June meeting.”

Von Gerich highlighted the seven-week window between when the ECB would make that decision and August, when bond markets are normally at their quietest.

That means the central bank could maintain the current pace of purchases next month and allow them to naturally fall over the summer, before making an active decision on a slower rate in September, he said.

“The ECB will want to avoid fuelling expectations that it will continuously do more,” said Katharina Utermoehl, senior economist at Allianz SE. “We’re looking at a strong recovery in the second half and the inflation outlook is improving. The ECB should be able to reduce purchases in the third quarter.”

The most important ingredient in June’s policy discussion will be updated projections for growth and inflation that are currently being compiled.

That last set showed consumer prices growing at an average annual pace of just 1.4% in 2023, far less than the ECB’S goal of below, but close to, 2% – and not yet back on the pre-pandemic track.

While business surveys signal a sharp pickup in price pressures amid surging commodities and logistical logjams, the underlying trend has weakened again. At the same time, nominal bond yields have increased and banks have tightened lending standards.