The European Central Bank (ECB) has revealed its plan to wind down the stimulus in the form of asset purchase programs as it revised up its inflation expectations
FILE PHOTO: Specialists work on a crane in front of the European Central Bank (ECB) in Frankfurt
The bank on Thursday laid out a plan to scale down its twin asset purchase programs and indicated that it was not likely to raise key interest rates before October 2022 in spite of soaring inflation in the eurozone.
The ECB said it will discontinue net asset purchases under the Pandemic Emergency Purchase Program (PEPP) of private and public sector securities at the end of March 2022, Xinhua news agency reported.
The PEPP is a key part of the ECB’s stimulus package to counter coronavirus risks and bolster the economy. It was first launched in March 2020, with an initial overall envelope of 750 billion euros ($847.6 billion).
The bond-buying program had been expanded twice in 2020 before its ceiling was eventually raised to 1.85 trillion euros.
In its monetary policy decisions, the ECB also confirmed “a lower pace” of net asset purchases in the first quarter of 2022, and decided to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2024.
The pandemic has shown that, under stressed conditions, flexibility in the design and conduct of asset purchases has helped counter the impaired transmission of monetary policy and made efforts to achieve the goal more effectively, the ECB said, yet without ruling out the possibility of resuming the emergency bond-buying program.
“Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic,” it added.
The ECB has also decided to temporarily raise monthly net asset purchases under the Asset Purchase Program (APP) to 40 billion euros for the second quarter of 2022 before cutting it down to 30 billion euros for the third quarter of 2022. Net bond-buying under the APP will then fall back to 20 billion euros per month from October 2022 onwards as per the ECB’s practice since November 2019.
The ECB’s Governing Council decided on Thursday to keep its key interest rates unchanged and said that the rates are not likely to be raised before October 2022.
“The Governing Council expects net purchases to end shortly before it starts raising the key ECB interest rates,” the bank said.
The moderation of the economic rebound in the eurozone does not seem to bother the central bank, which is optimistic that the eurozone economy will bounce back at a faster pace in 2022.
With regard to inflation, ECB President Christine Lagarde said in a statement that the bank expects it to remain elevated in the near term. She still insists that inflation is expected to decline in the course of 2022.
In its latest staff projections, the bank expects annual inflation to reach 2.6 per cent in 2021, 3.2 per cent in 2022, 1.8 per cent in 2023 and 1.8 per cent in 2024. These figures are significantly higher than those specified in the previous projections in September.
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