ECB’s shy monetary policy turn has started

In Short

At today’s meeting the Governing Council (GC) acknowledged the improved prospects for the euro area economy and announced a ‘moderately lower pace’ of purchases under its Pandemic Emergency Purchase Program (PEPP) than in the previous two quarters of the year.
Market Commentary
  • At today’s meeting the ECB’s Governing Council (GC) decided on a “moderately lower pace” of PEPP purchases compared to the two previous quarters based on an improved inflation outlook amid favorable financing conditions. Quite important, the decision was taken unanimously.
  • Today’s decision suggests to us that weekly PEPP buying will come down from the € 18 bn per week current average but will stay above the Q1 average of € 15 bn. Given that bond supply decreases in Q4 anyway, we see today’s decision merely as a signal that the monetary policy turn has begun but that it will be conducted very cautiously.
  • Lower PEPP purchases shall not affect credit markets as the amounts currently purchased are limited to € 1 to 2 bn per month. This is much less than under the CSPP (about € 5 bn) that will continue beyond the end of PEPP. Equities should behave decently well, withstanding the recalibration of the PEPP.
  • Looking ahead, the decision about the end of the PEPP and how to cushion it comes into focus. President Lagarde announced that key future policy decisions will be announced at the December meeting. Macro projections will then also  cover 2024 and the regular end of the PEPP is just three months ahead.

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