European Central Bank to announce tapering in December, analysts say

LONDON — The European Central Bank will announce the reduction of its Covid-related stimulus in December, four analysts told CNBC amid an economic improvement in the euro zone.

In the United States, the Federal Reserve has already signaled it is likely to start tapering before the end of the year. Chairman Jerome Powell said last week that the U.S. economy is at a point where it does not need as much policy support as had been the case in the wake of the pandemic, though the pace at which asset purchases will be reduced is yet to be decided.

And in the euro zone, a similar announcement could be just around the corner.

“My guess is that they will probably do it in December,” Gilles Moëc, group chief economist at AXA Investment Managers, told CNBC on Wednesday.

The ECB is meeting on Sept. 9, but analysts think the central bank will wait a few more months before announcing what it will do about its Covid-related measures.

“I think they want to give themselves some time and have new forecasts,” Moëc said, before the ECB governing council takes a decision.

In addition to having new forecasts on the table, Chiara Zangarelli, European economist at Nomura, said the ECB will also want to see what happens with the pandemic in the coming months.

But as things stand, she said, “it would be hard even for the dovish” members of the ECB to postpone an announcement on tapering beyond December.

ECB Chief Economist Philip Lane also said in an interview last week that “September is very far away” from the current conclusion date of its Covid-related asset purchase program, thus suggesting an announcement on tapering could take yet a few more months.

Market players are monitoring key data releases to understand how the ECB might react.

Preliminary data released Tuesday suggested the euro area experienced its highest inflation rate in a decade in August at 3% off the back of high vaccination rates and an easing of Covid restrictions in the region.

The ECB had said it was expecting a surge in consumer prices this year, though due to temporary factors. The central bank’s aim is to achieve a 2% headline inflation rate over the medium term. If higher inflation rates were to persist, this would add pressure on the ECB to revert its stimulus at a faster pace.

The institution led by Christine Lagarde developed a new asset purchase program in the wake of the coronavirus in March 2020 to support the euro zone. The Pandemic Emergency Purchase Program — known as PEPP — is due to end in March 2022 with a potential total envelope of 1.85 trillion euros ($2.19 trillion).

The program has given the ECB more flexibility, namely by being able to purchase Greek bonds, which did not fit the investment criteria to be bought under other programs.

“Whether PEPP purchases can fall meaningfully, I think it is a little premature, I think we will get an indication that PEPP purchases still remain very high throughout the fourth quarter before tapering in the first quarter,” Guillaume Menuet, European economist at Citi told CNBC’s “Street Signs Europe” Wednesday.

Moëc, from AXA Investment Managers, expects PEPP to be concluded in March  “but then the big conversation will be what to do with the APP.”

When the pandemic hit the euro zone in March of 2020, the ECB also kept its asset purchase program, known as APP, which has a current monthly pace of 20 billion euros. The central bank has been using this program in combination with PEPP to sustain the 19-member economy.

Salomon Fiedler, economist at Berenberg, told CNBC on Wednesday that the APP will probably last until 2023 and then a potential first-rate hike could take place in the fourth quarter of that year.

But, in the meantime, Zangarelli, from Nomura, said that the APP is likely to be extended in size once PEPP comes to an end. She expects these details to also be unveiled at the December meeting.

ECB’s Lane also said last week that “conditions to end APP are not there.”

“Regardless of when PEPP might end, that’s not the end of the ECB’s role in terms of QE. This is why we don’t need a huge lead time to think about it. Of course, we can’t leave it too late either. But six months is quite a lot of time. In the autumn, we’ll have to work through a lot of issues relating to what 2022 should look like,” he told Reuters.

“Covid, Covid, Covid,” Moëc, from AXA Investment Managers, said.

He said that the economic situation in the euro zone is benefiting from high vaccination rates and an overall prudency to avoid lifting all Covid restrictions. But even if the pandemic were to deteriorate in the coming months, he said that “the bar to maintain PEPP as it is today is very high.”

Across the wider European Union, 70% of the adult population has been fully vaccinated against the coronavirus.