Skip to content


ECB to keep policy loose this year despite high inflation risks

The European Central Bank will not change the total size of its asset purchase programme at its June 10 meeting but will start tapering its pandemic purchases later this year, according to a Reuters poll which also showed inflation risks to the upside.

With an economic recovery underway and price pressures rising, calls for winding down the emergency purchases have increased in recent weeks.

But several ECB members have said a decision to reduce purchases at the June 10 policy meeting was unlikely.

Nearly 90% of economists, or 34 of 39, in response to an additional question in the May 28-June 2 Reuters poll said the ECB would leave the €1.85 trillion worth of asset buys under its Pandemic Emergency Purchase Programme (PEPP) unchanged at its June meeting.

“As the recovery starts to gather speed, the ECB continues to walk a fine line between preserving favourable financial conditions and starting to unwind some of the emergency support measures unveiled during the pandemic,” said Angel Talavera, head of Europe economics at Oxford Economics.

“Given the still-fragile state of the economy, we think the ECB will maintain the level of asset purchases at its upcoming June policy meeting”.

Asked when the ECB would start tapering its asset purchases programme, a slim majority of economists, or 20 of 35, said sometime later this year, including 13 who expected a start as early as next quarter.

That was despite many ECB policymakers highlighting the risks of premature tightening.

Asked if the ECB would change the current end date of March 2022 for its PEPP, 28 of 39 economists said it would not.

And in response to another question, 31 of 36 said the risks to their inflation outlook over the next year were more to the upside than the downside.

Several ECB policymakers have said the central bank would look through higher inflation expectations for a while before they acted, viewing them as transitory.

The poll showed headline inflation would pick up sharply to average 1.8% this year.

Consumer prices rose 2% in May compared to a year earlier, according to a flash estimate, edging above the ECB’s target of just under 2% for the first time since 2018.

On a quarterly basis, inflation was expected to rise and averag 1.8%, 2.1% and 2.4% in Q2, Q3 and Q4 2021, respectively.

If the fourth quarter forecast is realised, it would be the highest average for any quarter since 2012.

But that rise was likely to be transitory, as inflation was then forecast to ease sharply to average around 1.4% in each quarter next year.

“The jump in euro zone inflation in May will not be the end of the upward trend,” said Andrew Kenningham, chief Europe economist at Capital Economics.

“However, most of the rise is due to temporary factors, including higher energy inflation, and we expect the headline rate to drop back to well below the ECB target next year,” he added.

The euro zone growth outlook was upgraded slightly, with the consensus pointing to 4.2% average growth this year and next, up from 4.1% for both the years predicted last month.

“With the increasing easing of coronavirus restrictions, economic and social life will resume in the coming weeks. We expect the economy to recover strongly once the lockdown ends, similar to the summer of 2020,” said Christoph Weil, senior economist at Commerzbank.

Article Source – ECB to keep policy loose this year despite high inflation risks – RTE

Copyright and Related Rights Act, 2000