ECB to keep buying bonds as it leaves rates unchanged

The European Central Bank has said it will keep its vast bond-buying programme running at a high pace despite rapidly rising inflation, setting it apart from other major central banks that are shifting towards tighter monetary policy.

After a two-day meeting of its governing council, the ECB said on Thursday that its €1.85tn pandemic emergency purchase programme (PEPP) would continue at “a moderately lower pace” than the €80bn-a-month level it ran at until last month.

The ECB kept its deposit rate unchanged at minus 0.5 per cent and postponed until its next meeting in December vital decisions such as how much stimulus it may provide next year via asset purchases and low-cost bank financing.

The ECB said it was “ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its 2 per cent target over the medium term”.

Instead, the immediate focus is on ECB president Christine Lagarde’s press conference later on Thursday, which will be scrutinised for what she says about the bloc’s inflation outlook and its consequences for monetary policy.

Economists expect eurozone inflation to rise to 3.7 per cent this month — its highest level since 2008 — propelled higher by supply chain problems and rising energy prices. Investors are betting this will prompt the ECB to raise its deposit rate late next year.

Underlining how inflationary pressures are rising in Europe, the selling price expectations of EU companies rose to a record high in October, according to the European Commission’s latest monthly survey. Consumer price expectations also rose to their highest level since November 1992.

German inflation also rose to 4.6 per cent in October from 4.1 per cent the month before, data released on Thursday showed, while in Spain higher energy prices have driven October inflation to a 37-year high of 5.5 per cent.

But the ECB has forecast eurozone inflation will fade back below its 2 per cent target next year; most economists think this means it will be able to resist pressure to raise rates.

Carsten Brzeski, head of macro research at ING, said: “While a reduction of asset purchases could be closer than some might think, a rate hike is definitely still far out.”

The ECB’s patient stance sets it apart from the Bank of England and the US Federal Reserve, which have both signalled a move towards tightening policy. On Wednesday, the Bank of Canada jolted markets by saying it would stop asset purchases and raise rates sooner than expected. Brazil’s central bank also hiked rates by 175 basis points, its biggest move in almost 20 years.

The ECB is expected to wind down PEPP next March. But even then its bond-buying is likely to continue, as its traditional asset purchase programme is still running at €20bn a month. This is expected to be expanded and made more flexible when PEPP ends.

The €1.41tn already spent under PEPP since it was launched in response to the Covid-19 crisis last year has allowed the ECB to exceed its self-imposed limit to own no more than a third of any country’s eligible sovereign debt.

Extending the flexibility of bond purchases is controversial in some quarters. When Jens Weidmann said last week that he would quit as head of Germany’s central bank at the end of the year, he warned in a letter to its staff: “Crisis measures, with their extraordinary flexibility, are only proportionate in the emergency situation for which they were created.”

Having bought the entire net supply of eurozone government debt over the past two years, the ECB has built up an overall portfolio of assets worth almost €4.5tn, equal to 40 per cent of eurozone gross domestic product.

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