On balance, after March, the ECB will buy less bonds, loans from governments and companies. The Pandemic Emergency Purchase Program (PEPP) has begun to offset the negative impact of the coronavirus pandemic on the economy.
Bond buying is a tool that central banks use more often to stimulate the economy. This ultimately makes it cheaper for companies and consumers to borrow money. When that money is spent, you stimulate the economy.
Support back to 0
The amount for which bonds are bought each month under the PEPP is currently EUR 60 billion. So that will go to zero from April next year.
The ECB cites two reasons for this. Firstly, the economy in the eurozone is improving and inflation is also rising. The ECB has been trying to raise inflation for some time. This one was long too low.
Other purchase program temporarily expanded
But the ECB has another buying program in place to counter the effects of the financial crisis. That is actually being expanded, from 20 billion euros per month to 40 billion euros per month. But because the size of PEPP goes to zero, the total amount for which the ECB buys bonds goes down.
The amount for which bonds are bought under the ‘normal’ purchase program will be further reduced to EUR 30 billion in the third quarter and to EUR 20 billion in the fourth quarter of next year.
The ECB is far from ready for an increase in official interest rates. That will only be the case when the bond-buying program has been completely wound down. “That will take at least another year,” said RTL Z exchange commentator Hans de Geus.
But Carsten Brzeski, ING’s chief economist in Germany, thinks a rate hike by the ECB could come sooner than many other market experts expect. “Maybe early 2023 already.”
North vs. South
He thinks the ECB’s communication is ‘very messy’. The size of the total purchase program will decrease, from a total of 80 billion euros per month now, to 20 billion euros per month in October next year. But because there are two buyback programs, the difference doesn’t seem that big at first glance, according to Brzeski.
He thinks that the ECB also officially takes southern European countries into account, which benefit from low interest rates because of the size of their debts.
ECB and Fed disagree
Brzeski also finds it striking that two major central banks, such as the ECB and the US Federal Reserve (Fed), disagree on whether the current sharply increased inflation is temporary or permanent.
Both believe that inflation is due to, among other things, the increased oil price and problems in the supply chain. But the ECB still assumes inflation is temporary, which is a big difference from Fed chief Jerome Powell, Brzeski said.
Yesterday, the Powell said the Fed will stop buying bonds in March and that it expects three rate hikes of 0.25 percent each in 2022. In the US, unemployment is low, a sign that the economy is doing well, and inflation is rising. In November inflation in the US was no less than 6.2 percent.
Higher interest rates in the UK already
In the UK, the central bank, the Bank of England, has already raised the official interest rate today, from 0.1 percent to 0.25 percent. That’s because of the pick-up in inflation, which at 6 percent is three times what the Bank of England is aiming for.