The ECB is likely to keep emergency purchases at steady pace and shift focus to September’s policy meeting
The European Central Bank is likely to keep its policy unchanged on today’s meeting and maintain a generous flow of stimulus, as the eurozone economy which is emerging from a double-dip recession, caused by coronavirus pandemic, still requires strong financial support to stay afloat.
The central bank’s top officials already signaled in their recent speeches that any reduction in bond buying is for now unlikely, with the idea either being flatly rejected or with comment that it was ‘far too early’ to talk about tapering ECB’s Pandemic Emergency Purchases Program (PEPP0, worth 1.85 trillion euros.
Although the bloc’s economic growth surged on easing restrictive measures and economic recovery picked up, the policymakers remain cautious as medium-term inflation prospects remain weak, but also concerned that rise in borrowing costs and any subsequent action of the central bank could spark higher market volatility and negatively impact still vulnerable recovery process.
On the other side, the risk of less smooth transition to fewer asset purchases rises on scenario of extended run of Pandemic Emergency Purchase Program at full speed.
The policymakers expect the economy will need another year just to return to pre-pandemic levels while they see the recent inflation jump, which exceeded central bank’s target of just under 2%, mostly as a reversal of last year’s sharp drop in energy prices and not the start of a new era of price pressures.
With the economic recovery in Europe being far behind the economic growth in the United States, any withdrawal of support before the Fed would be dangerous.