By Swathi Nair
BENGALURU (Reuters) – The European Central Bank is set to halve the amount of assets it buys each month from April, according to a Reuters poll of ECB-watchers who judged that a reprieve from high euro zone inflation by late 2022 means an interest rate rise is years away.
Policymakers at the Dec. 16 Governing Council meeting https://www.reuters.com/markets/rates-bonds/exclusive-ecb-governors-home-temporary-limited-bond-purchase-boost-sources-2021-12-09 will debate options on how to adapt the bank’s regular asset purchase programme (APP) once a much larger pandemic-fighting scheme ends in March.
The survey found relatively steady euro zone growth forecasts, with most citing the spread of new coronavirus variants, not persistent inflation, as the biggest economic threat next year.
While the risk of variants is global, the ECB differs in its response from its U.S. and UK counterparts as they are almost certain to raise interest rates from near-zero in 2022 – the Bank of England perhaps as soon as February.
The ECB has stipulated a rate hike “shortly after” bond purchases end and so is forecast to keep its key interest rates on hold through to end-2023 at least, with the deposit rate at -0.50% and its refinancing rate at zero – in sharp contrast to recent market expectations, now abandoned, for late 2022.
“We think that by the end of 2023, the conditions should be met for a rates lift-off, so given the rigid sequencing between the end of QE and the first rate hike, that might be when the ECB announces the end of APP (Asset Purchase Programme), possibly with a short taper,” Fabio Balboni, senior economist at HSBC, said.
The ECB is buying 80 billion euros of bonds per month, under its two programmes: 60 billion under the more recent Pandemic Emergency Purchase Programme (PEPP), which it has said it will end in March, and 20 billion under APP.
The Dec. 8-10 Reuters poll found that after April, the central bank is set to carry on buying 40 billion euros of bonds a month through the end of next year, with some forecasting ECB buys through to mid-2023.
The median from 21 forecasts showed a 20 billion euros APP top-up for a total of 40 billion euros.
But 13 of a slightly smaller sample of 20 respondents to an additional question said if the ECB approves an APP increase, there would be an envelope covering a longer period. The rest said it would be in set monthly volumes.
“ECB will commit to net APP purchases until at least the end of 2022, but the Council may decide to not yet commit to the 40 billion euros monthly pace for the entire year,” said Bas van Geffen, senior macro strategist at Rabobank.
In line with many other economists, van Geffen said the APP could also run through the following year.
About 70%, or 18 of 26, who responded to an additional question said the APP would finish by end-2023, while five said by Q4 2024 and three said Q4 2025.
Consensus forecasts for euro zone inflation, meanwhile, rose for a sixth consecutive monthly poll, set to top the European Central Bank’s 2% target through Q3 of next year.
“Inflation has been overshooting and the medium-term inflation outlook has become a bit more uncertain with risks skewed to the upside,” said Peter Vanden Houte, chief economist at ING.
Inflation, which soared to a 25-year high of 4.9% in November, was predicted to average 4.4% and 3.5% this quarter and next. That compares with 4.1% and 3.1% in last month’s poll.
It is set to average 2.5% next year after rising at the same rate this year, versus 2.2% and 2.4% predicted in November. Those are higher than the ECB’s latest projections of 1.7% and 2.2%, respectively.
The economy was expected to grow 0.6% this quarter and 0.7% in the next, a slight downgrade from 0.8% for both periods a month ago. It was expected to average 4.2% next year, unchanged from last month’s poll and slow to 2.3% in 2023, up from 2.1%.
About 60%, or 18 of 31 respondents, said the spread of new coronavirus variants was the biggest downside risk to the euro zone economy next year. Eleven said persistent inflation, while two others said extreme fiscal tightening, and higher energy prices.
(For other stories from the Reuters global long-term economic outlook polls package)
(Polling by Milounee Purohit, Sujith Pai and Swathi Nair; Editing by Ross Finley, Mark John and Barbara Lewis)