ECB could boost bond buying by another trillion euros

The European Central Bank (ECB) could expand its bond-buying program by a further 1 trillion euros ($1.12 trillion) over the next two to three years as inflation takes center stage, according to Berenberg European Economist Florian Hense.

The central bank earlier this month increased its Pandemic Emergency Purchase Programme (PEPP) by 600 billion euros to a total of 1.35 trillion euros in a bid to shore up the economy against the fallout from the coronavirus pandemic.

In a note Friday, Hense said that while the market broadly anticipates one more expansion of the PEPP envelope by around 500-600 billion euros, the ECB could deliver a total increase of between 800 billion and 1.6 trillion euros, depending on the inflation outlook, the success of the ECB’s long-term loans, and the currently paused monetary policy strategy review.

The unprecedented scale of asset purchases has succeeded in soothing financial markets following a historic downturn as the coronavirus spread throughout the world, and Hense anticipates that it will now have to turn its attention to inflation.

Hense identified the most important decision at the ECB’s Governing Council meeting earlier this month as the linking of the 600 billion euro PEPP increase explicitly to the “pandemic-related downward revision to inflation over the projection horizon.”

The ECB’s June 2020 projections suggest that after a 1.2% rise in 2019, euro zone consumer prices may only rise by 0.3% in 2020 and by 0.8% in 2021. Hense expects that with inflation well below the ECB’s target of close to, but below 2%, further policy easing will be needed to support growth and facilitate a faster incline in consumer prices.

Although recent policy measures by the ECB, along with fiscal stimulus from individual governments and the prospective EU-wide recovery plan, will have a positive effect on inflation, Hense said, it is only a matter of time before the central bank comes up with more.

ECB could boost bond buying by another trillion euros, economist projects, CNBC, Jun 29