ECB Preview, Quantitative Easing under the spotlight

14 December 2021

The European Central Bank (ECB) will hold its quarterly press conference on December 16th. The ECB must maintain its policy options open given heightened uncertainty regarding inflation. However, the institution will not abandon its transitory inflation view despite upside risks to the inflation outlook. The central bank will update its macro-economic projections with the first publication of the 2024 projection.

Please find below what we expect:

  • The ECB will maintain its forward guidance introduced in July 2021. ECB President Lagarde will emphasize that an interest-rate increase next year is very unlikely. However, she will also warn that the Governing Council (GC) will not hesitate to act when the three conditions of its forward guidance are satisfied. President Lagarde will not push back a rate liftoff beyond2023 year-end.
  • The pandemic emergency purchase programme (PEPP) will end in March 2022 as scheduled despite Omicron.
  • For the successor to the PEPP, the asset purchase programme (APP) should be upsized to an average €40bn per month beginning next April to the end of 2022. Additionally, the GC can supplement the €20bn monthly average of the APP with a fixed-size and temporary envelope until December 2022, between €150 to €200bn. 
  • We do not expect an announcement concerning the addition of Greek bonds to the APP at this meeting, given reinvestments in maturing Greek holdings under the PEPP. 
  • To prevent fragmentation risk, the flexibility of the PEPP will be transferred to reinvestments in maturing debt in the PEPP.
  • On the economic front, we expect the ECB’s inflation projections to be revised significantly higher in 2021 (2.5% vs 2.2% previously) and in 2022 (2.8% vs 1.7% previously). We expect the 2024 inflation forecast to stay below the long-term objective (2%) at 1.8%. On the growth side, we expect projections will indicate slightly higher growth in 2021 (from 5.0% to 5.1%), lower GDP growth in 2022 (from 4.6% to 4.3%) but higher growth in 2023 (from 2.1% to 2.3%). 

The main risk (judging from a hawkish stance) would be that the ECB decides to delay decisions on future QE to February 2022, claiming there is too much uncertainty to act at the current meeting, but this is not our base case scenario. The bond markets, namely in Italy, Spain, Portugal and particularly Greece, would be vulnerable under this scenario. 

Disclaimer

This commentary is intended for non-professional investors within the meaning of MiFID II. It is provided for informational and educational purposes only and is not intended to serve as a forecast, research product or investment advice and should not be construed as such. It may not constitute investment advice or an offer, invitation or recommendation to invest in particular investments or to adopt any investment strategy. Past performance is not indicative of future performance. The opinions expressed by La Française Group are based on current market conditions and are subject to change without notice. These opinions may differ from those of other investment professionals. Published by La Française AM Finance Services, head office located at 128 boulevard Raspail, 75006 Paris, France, a company regulated by the Autorité de Contrôle Prudentiel as an investment services provider, no. 18673 X, a subsidiary of La Française. La Française Asset Management was approved by the AMF under no. GP97076 on 1 July 1997.

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