ECB governors mull delaying call on future bond buys as outlook murky

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FILE PHOTO: Specialists work on a crane in front of the European Central Bank (ECB) in Frankfurt, Germany

By Francesco Canepa and Balazs Koranyi

FRANKFURT – A growing number of European Central Bank governors are considering delaying part of a decision on the ECB’s stimulus plans as the outlook has been muddied by a new coronavirus variant and mounting price pressures, sources said.

The ECB’s Governing Council will meet on Dec. 16 to decide whether to end its emergency bond purchases in March and how much debt to buy after that date in an effort to stabilise inflation in the euro zone at 2%.

With policymakers gathering for a seminar on Wednesday, three sources on or close the ECB’s policy-making Governing Council said there was agreement on ending the Pandemic Emergency Purchase Programme in March, as repeatedly signalled by President Christine Lagarde.

But some governors would favour leaving a decision on bond purchases after March to the ECB’s following policy meeting on Feb. 3, when more will be known about the impact of the Omicron variant and the outlook for inflation, the sources added.

They were likely to face some resistance from the ECB’s Executive Board, which has guided for a decision in December and may be wary of upsetting bond investors looking for reassurance.

Given the market pressures, another possibility was to lay out plans in December only for the first few months after PEPP ends, allowing policymakers to revisit their decision in early 2022, the sources added.

An ECB spokesman declined to comment.

Policymakers have grown less sure about the outlook over the past week as the emergence of the Omicron strain brought back travel restrictions and rattled financial markets.

Some felt there was still no way of knowing whether the Omicron variant would result in new disruptions to economic activity – a double edged sword as that would depress demand but also curtail supply for longer.

At the same time, inflation came in at record breaking 4.9% on Tuesday and showed signs of widening to more and more parts of the economy, suggesting that prices will stay higher for longer and possibly fuelling wage inflation.

The emergence of Omicron has also added to the dilemma of the Bank of England, the front-runner among the world’s biggest central banks to raise interest rates from their pandemic lows.

Its next monetary policy announcement is due on the same day as the ECB’s and investors have cut their bets on the chance of a 15 basis-point rate hike to about 65%, down from about 75% before news of the Omicron variant broke last week.

Policymakers’ doubts were also likely compounded by Federal Reserve chairman Jerome Powell on Tuesday abandoning his claim that the recent surge in U.S. inflation was transitory and signalling the Fed might withdraw support faster than planned.


So far the ECB has stuck to its line that inflation was mostly driven by temporary factors such as higher energy prices, supply bottlenecks and base effects from last year’s slump.

But the camp of policymakers seeing growing risk that inflation would settle at or above target in 2023 was growing, the sources said.

Policymakers have anyhow yet to find an agreement on how to smooth out the end of PEPP, with the debate likely to start at Wednesday’s seminar.

Some policy hawks do not see a need to add to the ECB’s six-year-old Asset Purchase Programme, which is running at 20 billion euros a month. They think that deploying proceeds from maturing PEPP bonds flexibly should suffice to tame any sign of market stress.

This option is not likely to find support, however, according to the sources.

Others want to at least retain any unused PEPP firepower, which could total 100 to 200 billion euros, to deploy it after March.

Others still favour creating an “envelope” of cash that can be spent to buy bonds as and when needed over a fixed period of time, much like in the case of the current emergency scheme.

Remaining options include adding a fixed amount of money to the APP’s monthly pace or launching a new programme altogether.

(Additional reporting by William Schomberg in London, Editing by Toby Chopra)