"Encouraging economic prospects combined with favorable financing conditions have prompted the European Central Bank (ECB) - as expected - to moderately scale back its asset purchases under the Pandemic Emergency Purchase Program (PEPP).
As expected, the ECB did not announce an exact figure, but after €80 billion in previous months, they are now likely to target €65 billion to €70 billion per month. Even though the ECB describes the move as an adjustment under the flexible PEPP, market participants are likely to see this as a first small step towards a very long and very cautious monetary policy normalization, especially since ECB President Lagarde explicitly referred to the December meeting on monetary policy recalibration. Then the important decisions will be taken on how to proceed with further asset purchases in the various purchase programmes.
"In this respect, today's meeting was probably more of an interim decision point. Nevertheless, there are two key points to mention that will also be important for the December meeting. First, the euro area economy is clearly rebounding, which is also reflected in renewed upward revisions to GDP forecasts for 2021. Second, cautious signs are emerging in the ECB's assessment that inflation may turn out to be higher than previously expected after all.
The projections for 2021 and 2022 were revised upwards, while for 2023, they remained roughly unchanged. At the same time, however, the central bank expressively stressed the risk that longer-lasting supply bottlenecks could feed through into higher than anticipated wage rises meaning that price pressure could be more persistent than previously thought.
"Against this background, the projections for 2024 at the December meeting will be decisive for the further stance of monetary policy expansion in 2022. Overall, we stick to our view that 2021 marks the peak of asset purchases; from 2022 onwards market participants will have to prepare for a significant reduction in bond purchases."