(Bloomberg) -- The European Central Bank will expand regular bond purchases for half a year to try to smooth the phasing out of its emergency debt-buying program and will loosen reinvestment rules around that crisis tool to use in the event of future market turmoil.
At a long-awaited meeting on post-pandemic strategy, officials in Frankfurt confirmed that their 1.85 trillion-euro ($2.1 trillion) pandemic measure would wind down as planned in March, but said that asset purchases under its older conventional program would rise to 40 billion euros a month starting in the second quarter.
Policy makers will then taper to 30 billion euros in the following three-month period, before returning to the existing pace of 20 billion euros in October.
“Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic,” the ECB said in a statement.
The decision is an acknowledgment that emergency policy settings must come to an end in the face of the euro area’s fastest inflation since the single currency was created and as economic output nears pre-crisis levels.
But the move also takes into account the heightened uncertainty triggered by the resurgent pandemic, which is already weighing on the continent’s recovery and has halted economic growth in Germany.
The ECB’s announcement follows Wednesday’s decision by the U.S. Federal Reserve to double the pace at which it tapers its own stimulus as it grapples with the biggest surge in consumer prices in three decades. The Bank of England was even more proactive on Thursday, unexpectedly becoming the first Group of Seven central bank to raise interest rates since the pandemic struck.
Unlike the Fed, the ECB hasn’t so far abandoned its insistence that elevated price gains are transitory -- driven by supply jams and soaring energy costs that will fade in 2022. Backing that view, IHS Markit said German inflation “might have peaked” as its latest gauge of activity showed Europe’s biggest economy stagnating in December.
“The progress on economic recovery and towards its medium-term inflation target permits a step-by-step reduction in the pace of its asset purchases over the coming quarters,” the ECB said. “But monetary accommodation is still needed for inflation to stabilize at the 2% inflation target over the medium term.”
President Christine Lagarde will elaborate on the ECB’s decisions at a press conference at 2:30 p.m. in Frankfurt. The fresh macroeconomic projections she’ll be armed with will show consumer-price growth back below the central bank’s 2% target in 2023 and 2024, according to people familiar with the matter.
That leaves the prospect of a hike in borrowing costs still some way off, with the benchmark deposit rate staying at -0.5%.
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