ECB Preview: The First Taper, But Don't Call It That

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by Tyler Durden
Thursday, Sep 09, 2021 - 04:02 AM


  • ECB policy announcement due Thursday 9th September; rate decision at 12:45BST/07:45EDT, press conference 13:30BST/08:30EDT
  • Consensus looks for a slowdown in the pace of PEPP purchases during Q4
  • A decision on the future of PEPP is not expected to take place at the upcoming meeting
  • Economic forecasts are set to see upgrades to 2021 growth and inflation. 2023 inflation is set to remain sub-target

OVERVIEW: As Newsquawk writes in its ECB preview, the ECB is set to stand pat on rates whilst leaving the size of the PEPP envelope unchanged at EUR 1.85 tln. Focus for PEPP will instead fall on the Q4 pace of purchases which is set to be lowered from the current "significantly higher" level of EUR 80bln/month. Those looking for clues on the future of PEPP when it concludes in March next year are set to be disappointed with the matter seemingly not on the table for the upcoming meeting. The press conference will likely see President Lagarde caution that any slowing in the pace of purchases for PEPP will not be regarded as a "taper" as purchases are not on track to reach zero and policymakers will vow to maintain favorable financing conditions. Spoiler alert: it is a taper, as the recent blowout in bund yields has amply demonstrated. The accompanying economic projections are set to see upgrades to 2021 growth and inflation. 2023 inflation is set to remain sub-target.

Nomura's visual forecast of the ECB's tapering is below.

PRIOR MEETING: As expected, the ECB stood pat on rates and the sizes of its bond-buying operations (PEPP and APP). In its newly formatted policy statement, the Governing Council adjusted forward guidance on interest rates to reflect its new symmetric 2% inflation target vs. its previous “close to, but below 2%” approach. One of the more interesting nuances of the statement was that its inflation mandate will be targeted via actual inflation outcomes and that rates will remain at present or lower levels until “it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon”. Emphasis on the projection horizon and on a durable basis was received dovishly by the market, alongside the ECB stressing that the medium-term outlook for inflation is still well below the Governing Council’s target. Sources in the immediate aftermath noted dissent from Weidmann and Wunsch on the new guidance due to the length of the commitment and lack of clarity on a potential exit strategy. Those looking for any clues on the future of the PEPP and APP purchases were left disappointed, with the statement reaffirming that PEPP will run until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over whilst forward guidance was maintained on APP. That said, sources the following day noted that policymakers were not expecting to make a decision on the future of PEPP bond purchases in September given the persistent uncertainty posed by the pandemic. Instead, a decision in October or December was seen as more likely. On the economic outlook, the ECB judged that the recovery remains on track with activity seen returning to precrisis levels by Q1 2022, that said, the Delta variant posed a source of uncertainty for the outlook.

RECENT DATA: On the inflation front, Eurozone Y/Y CPI in August rose to a ten-year high of 3.0% from 2.7% with a pronounced jump in the core (ex-food and energy) reading to 1.6% from 1.4%. Note, economists still anticipate inflation to slip back below the ECB's 2% target in early 2022. Q2 GDP metrics released since the prior meeting revealed Q/Q growth of 2.0% vs. the 0.3% contraction seen in Q1. Survey data for August saw the Eurozone-wide IHS Markit Composite PMI reading slip to 59.0 from 60.2 with the report noting ".. another strong quarter-on-quarter rise in GDP is on the cards for the third quarter, and we’re certainly on track for the eurozone economy to be back at pre-pandemic levels by the end of the year, if not sooner". Unemployment in the Eurozone fell to 7.6% in July from 7.8% as reopening efforts in the region continued to pick-up and furlough schemes suppress the headline metric. In terms of COVID milestones, the EU Commission recently announced that 70% of the EU population is now fully vaccinated against the virus.

RECENT COMMUNICATIONS: Given the summer break at the ECB, rhetoric up until the past few weeks had been relatively light. However, more recently, interjections from officials have helped shape expectations for the upcoming meeting. Comments from Chief Economist Lane drew attention after noting that it is too early to discuss the conclusion of PEPP (a viewpoint echoed by Villeroy and Kazaks) at the upcoming meeting, adding that such a conversation should take place in the Autumn. Furthermore, Lane downplayed the decision for Q4 purchases under PEPP as a "local adjustment". Lane also stuck to his assessment that upside pressures in inflation are transitory whilst citing the absence of large increases in wages; a viewpoint that was later echoed by Stournaras. Elsewhere, VP de  Guindos suggested that the accompanying economic forecasts could be upgraded whilst noting that the Delta variant is not having as great an impact as the Bank had projected four months ago. De Guindos went on to note that "If things start to return to normal, as is currently the case, the extraordinary measures will have to be gradually withdrawn. - We are not there yet, but we are gradually and continually moving towards that point". Hawkish members of the GC have been vocal ahead of the meeting with Knot stating that the outlook may allow slower ECB stimulus and PEPP to conclude in March, whilst Holzmann suggested the central bank is in a position to think about reducing pandemic aid.

RATES: From a rates perspective, consensus looks for the Bank to stand pat on the deposit, main refi and marginal lending rates of -0.5%, 0.0% and 0.25% respectively. Current forward guidance notes that rates will "remain at their present or lower levels until it sees inflation reaching two per cent 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 two per cent over the medium term.". Market pricing is not indicative of a move in rates by the ECB any time soon.

BALANCE SHEET: Although the size of the PEPP envelope is set to be left untouched at EUR 1.85tln, market participants are focused on the level of purchases set to be carried out in Q4, and what will happen to the Bank’s emergency bond-buying when the program draws to a close. On the former, the June meeting saw a rollover of the level of purchases in Q2 into Q3 (at circa EUR 80bln/month), which were conducted at a "significantly higher pace than during the first months of the year."

This time around, a poll by Bloomberg News suggests that purchases could be slowed to around EUR 50bln/month. Such a reduction would see the ECB use up most of its EUR 1.85tln envelope with just EUR 70bln not used. In terms of specific house views, UBS expects the Executive Board will opt to slow the pace of purchases to EUR 50-60bln, which would be “roughly on par with the pace in Q1, which [chief economist] Mr Lane remarked was also ‘pretty high’.” Barclays (who expect purchases to slow to EUR 60-70bln/month) suggests that the "significantly higher" line within the statement could be replaced by something along the lines of "“slightly higher than during (or close to) the first months of the year”. The ECB has been given cover to make such a decision given that financing conditions in the Eurozone are perceived to be easier than at the time of the June meeting. Note, Lane has already downplayed the upcoming decision as a "local adjustment." Furthermore, Lagarde will likely caution that any slowing in the pace of purchases for PEPP will not be regarded as a "taper" as purchases are not on track to reach zero and policymakers will vow to maintain favourable financing conditions. With regards to “life after PEPP,” those looking for any clues on this are likely to be left disappointed, with Lane already noting that it is too early to discuss the conclusion of PEPP, and discussion on the matter is set to take place in the Autumn. When the PEPP concludes, consensus expects the APP to be bolstered to a monthly purchase amount of EUR 40bln/month; this time around the pace of purchases is set to be held at EUR 20bln/month.

ECONOMIC PROJECTIONS: For the accompanying economic forecasts, UBS looks for an upgrade to the 2021 GDP projection from 4.6% to 5.0% amid the strong performance seen in H1. Next year’s projection is set to see a modest downgrade to 4.6% from 4.7% amid softer-than-anticipated spill overs from H2 2021, whilst 2023 should remain at 2.1%. On the inflation front, UBS expects 2021 to be upgraded to 2.1% from 1.9% with 2022 and 2023 set to be raised by 10bps each to 1.6% and 1.5% respectively with the latter projection still below-target for the ECB.

  • Current Inflation Projections (Jun'21): 2021 at 1.9% (prev. 1.5%), 2022 at 1.5% (prev. 1.2%), 2023 at 1.4% (prev. 1.4%)
  • Current GDP Projections (Jun'21): 2021 at 4.6% (prev. +4.0%), 2022 at 4.7% (prev. +4.1%); 2023 at 2.1% (prev. +2.1%)

Finally, courtesy of ING, here is a scenario analysis of what to expect tomorrow: