The European Central Bank is meeting while the Covid blockades complicate the recovery

FRANKFURT – With an almost impossible policy change this week, European Central Bank observers will have to closely monitor finer details of its pandemic stimulus program, while policymakers wait for more data before taking decisive action .

Recent economic figures indicate a stronger-than-expected economic recovery, and the subsequent blockade of the coronavirus in the euro area is unlikely to justify further central bank action.

“The political position is unlikely to change,” said Mark Wall, chief economist at Deutsche Bank, in a research note.

“A decision on whether or not to keep the new pace of PEPP procurement will be taken after a joint assessment of funding conditions and inflation prospects at the June 10 Council meeting,” he added, suggesting no updates for the meeting. on Thursday. in this week.

Following the pandemic, the ECB launched its Pandemic Emergency Procurement Program, or PEPP, which buys bonds in the region to stimulate lending and fuel an economic recovery. He left that program unchanged at its March meeting, with the target amount of the acquisition still another 1.85 trillion euros ($ 2.21 trillion) – which is to last until March 2022.

However, it decided to accelerate bond purchases on a monthly basis to alleviate some of the upward pressure on sovereign debt yields in the region – which had meant more expensive refinancing for eurozone countries or a tightening of financial conditions.

“PEPP’s purchases were 74 billion euros in March,” Wall said. “This was significantly higher than the 53 billion euros and 60 billion euros in February and January.”

But looking at the minutes of the ECB Governing Council meeting in March, it is clear that opposition to rising yields has not been as comprehensive as it first appeared.

“The decision to significantly accelerate the pace of procurement would show that the Governing Council would be willing to use the flexibility of the program without changing the overall package or duration of the program,” the March meeting said. The tone of the accounts could best be described as an act of balancing pigeons and falcons at the ECB.

There are more and more signs that the economy will grow strongly in the second half of this year.

The improved outlook has led some policy makers to give up and allude to an exit in the PEPP.

Pierre Wunsch and Klaas Knot, the heads of the Belgian and Dutch central banks, respectively, began discussions on a possible exit from the PEPP, the latter suggesting that it could take place as early as the third quarter of this year.

“If the economy grows in line with our baseline, we will see better inflation and growth starting in the second half,” Knot said earlier this month. “In this case, it would be just as clear to me that, starting with the third quarter, we can gradually start eliminating pandemic emergency purchases and ending them as planned in March 2022.”

This seems to be the beginning of a discussion that will probably gather steam during the summer.

“We doubt that this is assessed by the markets, but we agree that exiting the EPP will be the key issue for the ECB over the summer, given that the pace of economic recovery will increase rapidly in the second half, while inflation is expected to increase, “Anatoli Annenkov, an ECB observer for Societe Generale, said in a research note.

“It will be difficult to reduce PEPP material before the (Federal Reserve) that we currently expect to reduce in early 2022,” he added.