The ECB’s division deepens its reduction in bond purchases as the economy improves

European Central Bank policymakers took part in a lively debate last month on whether to slow the pace of their emergency bond purchases, in an indication that the argument will take center stage at upcoming political meetings.

The central bank’s more conservative “hawks” called for asset purchases to be cut in response to the cheerful economic outlook and better financing conditions, according to the minutes of last month’s ECB governing council meeting. The most “impoverished” proponents of weak monetary policy resisted.

In the end, a “broad consensus” emerged in favor of maintaining the current level of monetary stimulus offered through its 1.85 million euro emergency pandemic purchase program (PEPP), according to reports. the minutes. This makes it likely that the issue will recover at the next policy meeting later this month, before a likely decision at the next September meeting.

The ECB increased the pace of the PEPP to € 80 billion a month in March and has just over € 660 million left to spend; the PEPP must last at least until March 2022.

“Given the better prospects for growth and inflation and the associated upside risks, it was. . . argued that, to provide the same degree of accommodation, asset purchases should be reduced a bit, ”the minutes said.

Some board members expressed concern about the possible side effects of maintaining bond purchases “because they could hinder structural change in the corporate sector and the reallocation of resources to the labor market. In addition, real estate price dynamics were accelerating. ”.

The debate at the ECB has also taken place in other central banks, some of which have already decided to slow down the pace of bond purchases, such as in Canada and Australia. Others like the US Federal Reserve are still debate when you finish your stimulus.

This week’s announcement of the ECB’s call has made the competition more amateurish new strategy, which is committed to a slightly higher inflation target of 2%, which can be temporarily exceeded to avoid getting caught up in ultra-low rates.

Michael Schubert, an economist at Commerzbank, said the division of policymakers meant “it would be difficult to reach a fundamental decision on how to proceed with the PEPP and other emergency measures.”

Speaking after last month’s meeting, Jens Weidmann, the conservative head of the German central bank and a member of the ECB’s board, dit bond purchases should be “reduced step by step” and warned of the “upside risks” of eurozone inflation.

However, the ECB said that eventually “most members expressed their willingness to join a broad consensus behind the proposal” made by the ECB’s chief economist, Philip Lane, to maintain the pace of bond purchases. He said financing conditions were “assessed as too fragile” to allow a slowdown in bond purchases “without risking a disorderly rise in yields”.

The recovery was still “at an early stage and lacked robustness,” he said, adding that some board members expressed concern that it would slow the pace of their bond buying when it is not yet expected to inflation will reach its target in two years’ time. “questions” its resolution.

One board member even suggested that the pace of asset purchases should be increased “in view of the persistent lack of inflation forecast in the June staff projections.”

Last month, the ECB’s inflation forecast would fall from 1.9% this year to 1.4% in 2023.