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ECB To Accelerate Bond Purchases Over Next Quarter

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The European Central Bank said Thursday that it will step up its emergency bond purchases over the next quarter based on market conditions and left its key interest rates unchanged.

The Governing Council, led by ECB President Christine Lagarde, left the size of the pandemic emergency purchase program, or PEPP, unchanged at EUR 1,850 billion and said these will continue until at least the end of March 2022 or when the coronavirus crisis phase is over.

"Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects purchases under the PEPP over the next quarter to be conducted at a significantly higher pace than during the first months of this year," the bank said.

"The Governing Council will purchase flexibly according to market conditions and with a view to preventing a tightening of financing conditions that is inconsistent with countering the downward impact of the pandemic on the projected path of inflation," the ECB added.

ING economist Carsten Brzeski said market participants had started to speculate whether and how the ECB would react to the recent increase in bond yields and heating up of inflation fears.

The latest policy statement suggests that the ECB is trying to demonstrate its willingness to put a cap on bond yields without showing signs of panic, the economist added.

In December, the PEPP envelope was boosted by EUR 500 billion and the horizon for net purchases under the scheme was extended to at least the end of March 2022.

The bank said it will not use the PEPP provision in full if favorable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over its net purchase horizon.

The PEPP purchases can be recalibrated if required to maintain favorable financing conditions to help counter the negative pandemic shock to the path of inflation, the ECB said.

The bank will continue to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2023. The future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance, the bank said.

The size of the asset purchase program was also maintained. The monthly EUR 20 billion worth of asset purchases would continue as long as necessary, the bank said.

These will end shortly before the Governing Council starts raising the key ECB interest rates, the ECB said.

The Governing Council kept the main refi rate unchanged at a record low zero percent and the deposit rate was left at -0.50 percent. The lending rate was held steady at 0.25 percent.

Policymakers retained its forward guidance on interest rates, saying it expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 percent.

Reaffirming its commitment to provide ample liquidity, the ECB said the third series of targeted longer-term refinancing operations, or TLTRO III, remains an attractive source of funding for banks, supporting bank lending to firms and households.

"The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, in line with its commitment to symmetry," the ECB reiterated.

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