Domestic Bonds

3 things to watch out for when the ECB meets on Thursday

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European Central Bank President Christine Lagarde arrives to attend a plenary session at the European Parliament in Brussels, Belgium, Feb.8, 2021.

POOL / AFP via Getty Images

President Christine Lagarde can be expected to avoid mentioning the word charged – tapering – on Thursday after the regular meeting of the European Central Bank’s Governing Council. She may even be clever enough to ensure that the 25 members of the political body do not talk too much about it during their debates. After all, the ECB is unlikely to decide anything of the sort, like slowing the pace of its Covid-19 pandemic. bond buying program, reducing its size, currently at 1.85 trillion euros ($ 2.3 trillion), or announcing its termination before the scheduled end in March of next year.

But analysts and investors nevertheless scrutinize The words of Lagarde and his colleagues to find out what they are planning for the future. And whether or not they start seriously discussing the phase-out of quantitative easing on Thursday, the meeting must be seen in the general context of the continued “strategic review” ordered by Lagarde, which will see hawkish and accommodating European central bankers. fight once. again for the soul of the ECB.

Three things in particular will deserve close scrutiny on Thursday.

1 – Taper or not

Markets and analysts have been convinced in recent weeks by statements from ECB officials, such as board member Isabel Schnabel, that now is not the time to give up quantitative easing. But semantics, as always, will be crucial. The ECB, at its march meeting, decided to step up the weekly pace of its Emergency Pandemic Purchasing Program (PEPP) to counter the rise in yields that followed the fear of US inflation. Any indication that he will now return to the previous pace will be taken as a sign that he believes the threat is gone or that the economic recovery is stronger than thought three months ago.

Lagarde, on the other hand, could give some hints on what might follow the PEPP beyond March, with Bank of America analysts saying a possible increase in the ECB’s regular asset purchase program could be considered. , if only because monetary stimulus will always be necessary for the ECB to reach its “below 2%” inflation target.

2 – Economic forecasts

ECB staff forecasts will be the first to take into account US President Joe Biden’s stimulus package, which the Organization for Economic Co-operation and Development says could add 0.3% to the area’s gross domestic product euro next year. In March, the ECB recorded growth of 4% this year and 4.1% in 2022, with inflation at 1.5% and 1.2% respectively.

Inflation, at 2% per year in May, is now technically above the ECB’s “lower but close” target, but that shouldn’t stop Lagarde from insisting once again that this is mainly due to temporary factors, such as a surge in energy prices from last year’s pandemic lows or current supply chain disruptions – and that it must continue to support the economy through flexible monetary policies.

Nonetheless, a possible change in language on the outlook for growth or inflation over the medium term will be closely scrutinized for what they might mean for future policy.

3 – Performance issues

The acceleration of the PEPP since March has helped contain the rise in eurozone sovereign bond yields and spreads tightened as a result, a key element in maintaining the nebulous “favorable financing conditions”, which the ECB now considers to be. one of its main missions. Yield on Italian 10-year bonds, now at 0.82%, is down about 30 basis points from its May highs. And the spreads with German Bunds have tightened considerably in the meantime. Lagarde, who once said that the ECB’s job is not to contain yields (and came to regret the blunder within minutes), will need to guide investors on the level of the ECB’s acceptance of futures. yield increases in the context of the continuing recovery – if only to avoid being more brutally tested by the markets in the weeks or months to come.