As the economy improves, the European Central Bank’s divergence in curtailing bond purchases deepens

Decision makers of the European Central Bank launched a heated debate last month on whether to slow down the pace of emergency debt purchases, indicating that this argument will take center stage in the upcoming policy meeting.

The minutes of the meeting of the European Central Bank Management Committee last month showed that the more conservative “hawks” of the central bank called for reducing the scale of asset purchases in response to a brighter economic outlook and improved financing conditions. Supporters of the more “dovish” loose monetary policy resisted.

The minutes of the meeting reported that a “broad consensus” finally emerged to support the maintenance of the current level of monetary stimulus provided by its 185 million euro pandemic emergency purchase plan (PEPP). This makes this issue likely to be re-discussed at the next policy meeting later this month, and then a decision may be made at a follow-up meeting in September.

The European Central Bank accelerated the pace of PEPP in March to reach 80 billion euros per month, and only more than 660 billion euros in expenditure are left; PEPP will continue until at least March 2022.

“Given the better growth and inflation outlook and the associated upside risks, it is… The minutes of the meeting stated that in order to provide the same degree of convenience, asset purchases should be curtailed.

Some council members expressed concern about the potential side effects of maintaining bond purchases, “because this may hinder structural changes in the corporate sector and the reallocation of resources in the labor market. In addition, real estate price dynamics are accelerating.”

The European Central Bank’s debate is also being staged in other central banks, some of which have decided to slow down the pace of debt purchases, such as Canada and Australia.The Federal Reserve and other institutions are still debate When will their stimulation end.

The European Central Bank announced this week New strategy, It promises to be slightly higher than the 2% inflation target, which can be temporarily exceeded to avoid falling into ultra-low interest rates.

Deutsche Commerzbank economist Michael Schubert said that the disagreement of policymakers means that “it may be difficult to make fundamental decisions on how to implement PEPP and other emergency measures.”

After the meeting last month, Jens Weidmann, President of the Bundesbank and member of the Council of the European Central Bank, delivered a speech, Say Bond purchases should be “gradually reduced” and warned of the “upside risks” of inflation in the euro zone.

However, the ECB ultimately stated that “most members have expressed their willingness to join the broad consensus behind the proposal proposed by the European Central Bank’s chief economist Philip Lane” to maintain the pace of its bond purchases. It stated that financing conditions were “assessed as too fragile” to slow down bond purchases without “risking a disorderly rise in yields”.

It stated that the recovery is still “in its early stages and lacks robustness” and added that some council members expressed concern that slowing down the pace of debt purchases would “be against Determined to express doubt”.

A board member even suggested that it should accelerate the pace of asset purchases “in view of the continued insufficient inflation projected in the June staff forecast”.

Last month, the European Central Bank predicted that inflation will fall from 1.9% this year to 1.4% in 2023.

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