ECB meeting: tapering, but slowly
The ECB is currently preparing for its final meeting of 2021. The development of the inflation rate plays an important role for the further design of monetary policy measures, as the annual inflation rate in the eurozone reached a new high of 4.9% in November. The economic outlook for 2022 should also be optimistic, as in September the ECB forecast growth of 4.6% for the coming year. These two factors have made calls for an end to the PEPP (Pandemic Emergency Purchase Programme) bond-buying programme louder, and rightly so, even if the new restrictions due to significantly rising Covid-19 case numbers and the new Omicron variant have resulted in increased anxiety. In addition to the economic framework data, another important argument is the increasingly obvious scarcity of German government bonds. According to Bloomberg calculations, the amount of outstanding German Bunds (defined as bonds held by non-price-sensitive investors) is only 11 percent. As a result, their prices have become increasingly difficult to explain in economic terms.
At its upcoming meeting, we expect the ECB to announce that the PEPP purchase programme will end as planned at the end of March 2022. The central bank will probably postpone clear statements on the future design of the other, smaller purchase programme (APP) until its next meeting at the beginning of February. This will give the ECB time and more clarity on future inflation developments. The expectation that the November inflation figures were the peak of the current cycle is being jeopardised by steadily rising prices for gas and electricity. For the time being, the results of research into the Omicron variant raise hopes for a mild illness, but these statements are not yet certain. There should also be more clarity on this by the next ECB meeting. The distortions in German government bonds could weaken again as soon as investors are ready to part with particularly safe investments at the start of the new year. Also, the new German federal government plans to pass a supplementary budget in the coming days and the 2022 budget already passed by the previous government also provides for net new debt of about EUR 80 billion. The debt ceiling is still suspended for 2022.
The new forecasts for further economic development presented with the interest rate decision, and in particular the forecast for future inflation development, will be of central importance. In September, the ECB was still forecasting inflation rates of 1.7% in 2022 and 1.5% in 2023. It will have to raise these figures. However, statements made by Ms Lagarde that interest rate hikes are unlikely in 2022 suggest that the forecasts for the future will remain below 2%. Only when the expectation of permanent inflation of 2% or slightly above has become entrenched in the minds of consumers will the central bank be prepared to raise its interest rates.
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