ECB dials back some stimulus, ups inflation forecast

LONDON (Reuters) -The European Central Bank cut support for the euro zone economy by another notch on Thursday but promised copious support for 2022, confirming its relaxed inflation view and indicating that any exit from ultra-easy policy will be slow.

The ECB now sees inflation averaging 3.2% in 2022, versus the 1.7% projected in September, before subsiding to 1.8% in 2023

Germany’s 10-year Bund yield, already pushed up by a surprise Bank of England rate hike, was up 5 basis points on the day at -0.32% and Italian 10-year yields were up 10 bps.

Below is the reaction from analysts:

HSBC

“Overall, we think the announcement is relatively hawkish. The ECB has effectively announced an additional 90 billion euros of purchases in Q2 and Q3 2022. This is fairly similar to simply using what is likely be left in the PEPP 1.85 trillion euro envelope when PEPP ends in March. So while it does provide some additional support to bond markets, it implies a fairly steep taper, softening only slightly the potential ‘cliff edge’ in purchases and providing little additional market support beyond Q3 next year.”

“However, today’s announcement doesn’t necessarily mean policy rate rises are any closer. The GC maintained its intended sequencing that it expects net purchases to end ‘shortly before’ it starts raising the key ECB interest rates. With net purchases now pretty much nailed on until at least the end of 2022, market expectations of a 15 bps policy rate rise next December look a little overdone.”

HOLGER SCHMIEDING, CHIEF ECONOMIST, BERENBERG

“Relative to the Fed’s dramatic pivot yesterday and the Bank of England’s rate hike today, the European Central Bank remains in the slow lane. As expected, the ECB announced today that it will reduce its net asset purchases step-by-step next year. But the ECB left the question when it will end these purchases and start to raise rates wide open.”

“The ECB’s projections of 1.8% inflation for 2023 and 2024 suggest that the ECB considers a first rate hike as highly unlikely in 2022 and as possible but not yet likely in 2023.”

“We expect more inflation than the ECB for 2023 and 2024 and look for two 25bp rate hikes in 2023 (June and December) and three further hikes in 2024.”

KONSTANTIN VEIT, PORTFOLIO MANAGER, PIMCO

“While we expect a gradual reduction in the pace of net asset purchases over time as the pandemic situation improves, it remains less likely that the ECB will end quantitative easing and raise policy rates in the foreseeable future.”

“We believe the chances for the Euro area encountering a medium to longer term inflation problem are modest, particularly compared to jurisdictions where fiscal policy is traditionally less constrained in taking private sector behaviour into account.”

IMA SAMMANI, FX STRATEGIST, MONEX EUROPE

“ECB reveals a modest bridge between PEPP and APP. After a major hawkish surprise from the Bank of England, the European Central Bank’s decision was more in line with market expectations.”

“(The decision) comes on the hawkish side of expectations as it was unknown whether the ECB would actually announce a bridging mechanism for once PEPP expires, given the uncertainties around Omicron and the recent lockdown measures in several eurozone countries.”

ARNE PETIMEZAS, AFS GROUP

“Pandemic QE ends as expected in March 2022. There is also a strong hint that the tiering multiplier will be increased by the middle of next year. That means that the ECB will use tiering to manage the decline in the balance sheet once banks start to repay the TLTROs in June of 2022. All in all, I call it a dovish surprise.”

TD SECURITIES

“The decision provides markets with more clarity than many were expecting today, with the APP relatively nailed down through 2022. The hawkish messaging does suggest an end to the APP sometime in 2023, with rate hikes following shortly thereafter.”

HUSSAIN MEHDI, MACRO AND INVESTMENT STRATEGIST AT HSBC ASSET MANAGEMENT

“Following hawkish outcomes at the BoE and Fed meetings, the ECB has opted for a more dovish approach in the context of Omicron uncertainty, maintaining a flexible approach to asset purchases in 2022 with the added implication that rate hikes remain a long way off.”

ABN AMRO (AS:ABNd)

“Overall, the end of the PEPP is cushioned by a longer period of reinvestments under the PEPP and a stepped up APP that will likely run through 2022.”

“Overall, this amounts to a very dovish taper. “

Source: Investing.com