ECB slows pace of pandemic bond purchases after inflation jumps to decade high

Christine Lagarde European Central Bank ECB
Christine Lagarde is president of the European Central Bank. Thomas Lohnes/Getty Images
  • The European Central Bank will dial down the pace of its pandemic bond purchases, it said Thursday.
  • The ECB move came after inflation hit a 10-year high in August and Q2 GDP growth beat expectations.
  • The central bank’s pandemic emergency purchase program is worth 1.85 trillion euros, or $US2.2 ($AU3) trillion.
  • See more stories on Insider’s business page.

The European Central Bank has said it will slow the pace of its pandemic bond purchases after eurozone inflation jumped to a 10-year high in August.

It has been buying bonds at a pace of around 80 billion euros ($US90 ($AU122) billion) a month under its 1.85 trillion euro ($US2.2 ($AU3) trillion) pandemic emergency purchase program, known as PEPP.

But the eurozone’s central bank said Thursday it will now purchase bonds at a “moderately” slower rate heading toward the expected end of the scheme in spring next year. It left its main interest rate unchanged at the record-low level of -0.5%.

The ECB did not say what the new rate of purchases would be, but said it would buy bonds “flexibly according to market conditions and with a view to preventing a tightening of financing conditions.”

ECB President Christine Lagarde insisted that the central bank was keeping up its support for the economy. “The lady’s not tapering,” she said at the press conference, using the term for the winding-down of bond purchases.

She said the bank can adjust purchases as required, but gave little information about when exactly PEPP might end or what might happen afterwards.

Europe’s Stoxx 600 stock index rallied after the decision to stand roughly flat for the day, while the euro pared its gains against the dollar to trade at $US1.182.

The ECB’s move comes after euro area inflation jumped to a decade-high of 3% year-on-year in August and GDP grew a stronger-than-expected 2.2% in the second quarter, as the rollout of coronavirus vaccines helped power a recovery in the single-currency bloc.

Rising inflation is causing headaches for central bankers around the world. The ECB has said it thinks strong price rises will be temporary, and are the result of the rapid reopening of economies.

Yet “hawks” on its governing council such as Germany’s Jens Weidmann appear keen to get a grip on inflation, fearing it could spiral upwards. “Doves” argue that strong stimulus is still needed as the bloc battles the Delta coronavirus variant.

The ECB said it expects inflation to average 2.2% in 2021 but cool to 1.5% in 2023, well below the central bank’s target rate of 2%.

The central bank’s bond-buying program differs from the US Federal Reserve’s, which is potentially unlimited. The ECB’s PEPP is capped at 1.85 trillion euros and was added to the existing asset purchase program (APP), which buys 20 billion euros of securities each month.

Investors are keen to hear more about what will happen when PEPP ends, but the ECB is not expected to give details until later this year.

“We expect the PEPP to end next year, potentially as early as March 2022, and expect the regular APP to be upsized from 20 billion euros to 60 billion euros per month in return,” Konstantin Veit, a portfolio manager at PIMCO, said.