ECB to slow bond-buying ‘moderately’ as Europe’s economy improves

Lagarde allays investor fears over ‘tapering’ but says euro zone is ‘not out of woods’

ECB president Christine Lagarde: ‘The lady isn’t tapering.’ Photograph: Ronald Wittek/EPA

ECB president Christine Lagarde: ‘The lady isn’t tapering.’ Photograph: Ronald Wittek/EPA


European Central Bank president Christine Lagarde said “the lady isn’t tapering”, reassuring bond investors even as the ECB announced it would buy fewer bonds in a sign of confidence in the euro zone’s economic recovery.

After a two-day meeting of its governing council, the ECB said on Thursday it had decided to move to “a moderately lower pace” in its €1.85 trillion pandemic emergency purchase programme (PEPP) from the €80-billion-a-month level it has run at since March.

Following the announcement, Italian 10-year bond prices rose sharply, recouping recent losses and pushing the yield down 0.08 percentage points to 0.67 per cent. The PEPP has been a boon to the bonds of more indebted euro area countries, which sold off sharply during the height of the coronavirus crisis in markets last year. Bond yields fall as prices rise.

The news came as the State’s National Treasury Management Agency (NTMA) on Thursday sold €1.25 billion in long-term treasury bonds.

The State was seeking to raise €1.25 billion through the auction. The sale consisted of two bonds: one that matures in 2031 and the other in 2041. The 2031 bond had a yield of 0.2 per cent, with a cover ratio of 2.43. The bond maturing in 2041 had a yield of 0.55 per cent, with a cover ratio of 2.1. The sale brings the total raised in benchmark bonds this year to date to €16 billion. The NTMA expects to raise up to €20 billion in bond markets this year to cover a budget gap caused by the Government’s response to the Covid-19 pandemic and potential fallout from Brexit.

Strong rebound

The ECB’s decision to slow the PEPP, its flagship policy response to the pandemic, follows a strong rebound in euro zone growth and inflation, as rising Covid-19 vaccinations have helped to end lockdowns and boosted business and household activity.

Lagarde echoed the well-known quote by former British prime minister Margaret Thatcher that “the lady’s not for turning” as she assured a press conference that the unanimously agreed shift to a slower pace of purchases was not tapering.

Most analysts agreed the ECB’s decision is different to other central banks’ unwinding of monetary support because the ECB is not planning to end its bond-buying yet and is only “recalibrating” its pace.

“This is not a tapering decision,” said Elga Bartsch, head of macro research at the BlackRock Investment Institute. “Asset purchases look here to stay as the new policy framework paves the way for looser-for-longer monetary policy in the euro area.”

In contrast, the US Federal Reserve and the Bank of England have said they plan to start tapering asset purchases this year. Central banks in Canada, New Zealand and Australia have already started to do so.

Lagarde said the ECB’s decision to slow bond purchases reflected an improvement in financing conditions in recent months and signs that the “rebound phase in the recovery of the euro area economy is increasingly advanced”, with 70 per cent of adults having been vaccinated.

Risks ‘broadly balanced’

However, she said: “There remains some way to go before the damage done to the economy by the pandemic is undone,” adding that 2 million more people were out of work than before the pandemic and many more were still on furlough schemes. “We are not out of the woods.”

Lagarde said the risks for the economic outlook were “broadly balanced” and “price pressures are building only slowly”.

A “fourth wave” of coronavirus infections could still derail the recovery, she said, adding that supply chain bottlenecks, which have left carmakers and other manufacturers short of chips and other materials, “could last longer and feed through into stronger-than-expected wage rises”. But she added that there was still little sign of significant wage increases.

The ECB has €500 billion left to spend under the PEPP and it said the scheme would continue until at least March 2022, or until the council decided “the coronavirus crisis phase is over”. Even at a reduced pace of €60 billion-€70 billion a month, analysts say the PEPP still has enough firepower to soak up all the new debt issued by governments for the rest of the year.

Asset purchase

The ECB is set to continue buying bonds even after the PEPP ends and most other central banks stop their purchase programmes altogether. Its traditional asset purchase programme is still running at €20 billion a month and is likely to be expanded and made more flexible when the PEPP ends.

“We all broadly know the trajectory PEPP is on now,” said Paul O’Connor, portfolio manager at Janus Henderson. “Defining what happens after with the asset purchase programme is going to be a really big battleground between the hawks and the doves in the coming months.”

Lagarde said a decision on ending PEPP and what replaced it was expected in December. The ECB raised its growth forecast for this year to 5 per cent, saying that would dip to 4.6 per cent next year and 2.1 per cent in 2023.

It also lifted its forecast for prices, saying inflation would rise above its target to 2.2 per cent this year, before dropping back to 1.7 per cent next year and 1.5 per cent in 2023.

Konstantin Veit, portfolio manager at Pimco, said inflation was unlikely to rise enough for the ECB to lift its deposit rate from minus 0.5 per cent until late 2023 at the earliest, predicting it would “continue to buy assets for years to come”.

– Copyright The Financial Times Limited 2021