Economists expect the European Central Bank to continue its net asset purchases for two more years — well after other major central banks begin to scale theirs back — according to a Financial Times survey.
Three-quarters of the 32 economists polled by the FT said they expected the ECB to stop expanding its €4.6tn bond portfolio in 2023; only just over a quarter said they thought it would do so before that.
Many central banks around the world have already started to reduce their monetary stimulus in response to sharp rises in inflation as the global economy bounces back from the shock of the coronavirus pandemic.
The ECB has been slower than most; in December its president Christine Lagarde said its €1.85tn pandemic-response scheme would stop net bond purchases in March, while an older asset purchase scheme would undergo a “step-by-step” reduction until at least October. However she has not specified when net asset purchases would stop altogether.
In contrast, the US Federal Reserve said last month it would accelerate the tapering of its bond purchases to finish at the end of March, while the Bank of England said after it raised interest rates last month that its net purchases would stop at the end of the year.
William De Vijlder, chief economist at French bank BNP Paribas, was among those predicting the ECB would continue its net bond purchases until 2023. He said the biggest risk for the eurozone economy was that “supply disruption continues, causing inflation to remain elevated, leading to a complete reassessment of the outlook for ECB policy”.
Inflation in the eurozone soared to 4.9 per cent in November, a record high since the single currency was launched more than two decades ago, driven by soaring energy prices, resurgent demand and supply chain bottlenecks.
Last year the ECB agreed a new strategy, committing not to raise its deposit rate from the current low of minus 0.5 per cent until it was convinced inflation would reach its 2 per cent target within the next two years and stay there for a further year. It also requires underlying inflation, excluding energy and food prices, to be “sufficiently advanced” to achieve its target. It said asset purchases would stop shortly before it raised rates.
More than half of the economists polled by the FT said they expected the ECB to start raising its deposit rate by 2023. More than a quarter thought it would not do so before 2024.
Lena Komileva, chief economist at G+ Economics, predicted the ECB would halt its bond-buying this year and raise rates by late 2023. Like several others, she warned of the risk of tightening monetary policy too soon — something the ECB was criticised for doing in 2011 when it raised rates twice on the cusp of the eurozone sovereign debt crisis.
“While the effects of each new pandemic wave on growth are fading and inflation likely peaked in late 2021, a policy rush towards withdrawing fiscal and monetary support for private sector capital — industry, bank and entrepreneurial — in an ongoing pandemic is by far the biggest risk to the outlook,” she said.
Almost four-fifths of economists predicted the ECB would tighten policy in the summer by making the rate less attractive on the subsidised loans it is providing to banks, known as targeted longer-term refinancing operations. These €2.2tn of loans at rates as low as minus 1 per cent give banks an easy source of profit by effectively paying them to borrow money.
The economists were evenly split on whether the EU’s new €800bn recovery fund greatly reduces the chances of a eurozone bond market sell-off. The fund provides grants and loans from Brussels to member states to support their economic recovery in exchange for structural reforms.
“Periphery spread levels are tight, and volatility might rise as the ECB reduces its purchases,” said Alberto Gallo, portfolio manager at Algebris Investments, referring to the spread between the borrowing cost of weaker countries on Europe’s periphery such as Italy and those of stronger ones such as Germany.
“In particular, we might see volatility around French elections and potentially around Italian elections,” he warned.