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ECB To Kick Off Stimulus Unwind In March

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The European Central Bank said on Thursday that it will discontinue purchasing assets under its Covid-19 pandemic stimulus scheme at the end of March and continue slowing asset purchases during the rest of next year, as support for maintaining an expansionary monetary policy is fast drying up in the face of stubbornly high inflation in the euro area.

Pressure mounted on the ECB to not fall behind the curve with the Federal Reserve accelerating its tapering plans this week and the Bank of England hiking its key interest rate, earlier on Thursday, for the first time since 2018.

The EUR 1,850 billion pandemic emergency purchase programme, or PEPP, was launched in March 2020 to support the euro area economy and financial system amid the risks posed by the disruptions caused by the coronavirus pandemic.

The Governing Council, led by ECB President Christine Lagarde, decided to extend the reinvestment horizon for the PEPP to until at least the end of 2024, the bank said. Earlier, the reinvestments were set to end at the end of 2023.

Policymakers also decided a monthly net purchase pace of EUR 40 billion in the second quarter and EUR 30 billion in the third quarter under the asset purchase programme, or APP. Monthly asset purchases under the scheme are currently conducted at EUR 20 billion.

Further, the ECB said net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.

Flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability, the ECB said.

In the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time, the bank added.

From October 2022 onwards, the Governing Council will maintain net asset purchases under the APP at a monthly pace of EUR 20 billion for as long as necessary to reinforce the accommodative impact of its policy rates, the bank said.

The ECB reaffirmed that it expects net purchases to end shortly before it starts raising the key ECB interest rates.

The bank left its key interest rates unchanged as expected. The main refinancing rate thus remains at zero, the deposit rate at -0.50 percent and the marginal lending rate at 0.25 percent.

"The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it sees inflation reaching 2 percent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2 percent over the medium term," the bank said.

The bank reiterated that it expects the special conditions applicable under its targeted lending operation, TLTRO III, to end in June next year.
The ECB has entered into a very cautious tapering process, ING economist Carsten Brzeski said.

"This is less clear-cut than we had expected - the ECB chose to ensure the same level of PEPP flexibility in the asset purchases, including allowing it to purchase Greek bonds, and with a transition programme and not the reinvestment of PEPP purchases," Brzeski said.

"Rate hikes are still far off."

Capital Economics expects inflation to be even higher than the ECB forecasts next year.

"We agree that, on balance, inflation is likely to come back below 2 percent over the medium term but the risks of it remaining higher for longer, and of the ECB raising interest rates slightly in 2023, have increased," Capital Economics economist Andrew Kenningham said.

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