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Epidemics

ECB Faces Delicate Task in Unwinding Pandemic-Era Stimulus

Strategic Insights

— 1 min read

The European Central Bank, led by President Christine Lagarde, is navigating a complex challenge in unwinding its massive monetary stimulus without disrupting the eurozone's economic recovery. As the ECB prepares to scale back its 1.85 trillion euro pandemic emergency purchase program (PEPP), economists warn that the central bank must balance the need to reduce stimulus with the risk of spooking the bond market. Meanwhile, the ECB is grappling with rising inflation, which has surged to a decade-high of 3% in August, fueled by shortages and resurgent demand.

Key Takeaways:

  • The ECB's pandemic emergency purchase program (PEPP) will be unwound, with economists expecting a reduction in monthly purchases from 80 billion euros to 70 billion or 60 billion euros.
  • The ECB is divided between "hawks" who want to reduce stimulus and "doves" who want to maintain a sizeable stimulus to support recovery.
  • Hawks, including Jens Weidmann of Germany, Klaas Knot of the Netherlands, and Robert Holzmann of Austria, worry that inflation will continue to outstrip expectations, fueled by supply chain bottlenecks and resurgent demand.
  • The ECB will raise its predictions for inflation this year and coming years, even though analysts predict a sharp decline in inflation next year and below the central bank's target throughout 2023.
  • The size of the ECB's traditional purchase program, currently running at 20 billion euros a month, is expected to be doubled or tripled when PEPP ends.

Statistics:

  • The ECB's pandemic emergency purchase program (PEPP) stands at 1.85 trillion euros.
  • Eurozone gross domestic product expanded by 2% in the second quarter, overtaking China and the US for the first time since the pandemic hit.
  • Inflation rose to a decade-high 3% in August.
  • The ECB's inflation target is 2%.
  • The ECB's traditional purchase program is currently running at 20 billion euros a month.

Sources:

  • Silvia Ardagna, chief European economist at Barclays: "The key questions are what happens to asset purchases after PEPP ends and what they expect on inflation."
  • Bundesbank president Jens Weidmann: "The risks are tilted to the upside right now."
  • Katharina Utermohl, senior economist at Allianz: "The recent surge in eurozone inflation looked more modest if averaged over two years, which reduces it to below 1.5 per cent."

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