The European Central Bank said on Thursday that it would slow down its pandemic-era bond-buying program, one of the main tools it has used to support the eurozone economy through lockdowns, citing “favorable financing conditions” and the inflation outlook.
The program, which lately has been buying about 80 billion euros, or $95 billion, of mostly government bonds each month, is a way to keep borrowing costs low and spur economic growth.
Despite the bank’s depiction of an improving economic outlook for the eurozone, its decision to “moderately” reduce the pace of purchases wasn’t designed to signal to markets that monetary stimulus in the region was being tightened yet. The central bank is still trying to secure a sustained recovery and get inflation to reach its 2 percent target over a longer period.
Traders seemed to understand the message: Government bond yields drifted lower, and the euro was little changed after the announcement.
The central bank’s president, Christine Lagarde, insisted that the slowdown in purchases wasn’t a tapering of asset purchases that would reduce buying to zero, a step the U.S. Federal Reserve is preparing to take. Instead it was a “recalibration” of the program, approved unanimously by the bank’s policymakers.
“The lady isn’t tapering,” Ms. Lagarde said at a news conference.
“The rebound phase in the recovery of the euro-area economy is increasingly advanced,” she said. She added that the economy was expected to return to its prepandemic size by the end of the year.
But, she said, “the current increase in inflation is expected to be largely temporary, and underlying price pressures are building up only slowly.”
The pandemic bond-buying program began in March 2020 as the coronavirus spread across Europe and was meant to buy €1.85 trillion in bonds and run until at least March 2022. The slowdown would help ensure that the purchases end on schedule, though the central bank hasn’t ruled out an extension.
“Based on a joint assessment of financing conditions and the inflation outlook, the governing council judges that favorable financing conditions can be maintained with a moderately lower pace of net asset purchases,” the central bank said in statement on Thursday.
Analysts at the Dutch bank ING and the British bank Barclays both said they expected the central bank to buy between €60 billion and €70 billion of assets each month to the end of the year.
Other policy measures were left unchanged. Interest rates were held steady, including the so-called deposit rate, which remained at –0.5 percent. The negative rate is essentially a charge on deposits to encourage commercial banks to lend more. Policymakers also maintained the size of the bank’s other bond-buying program, which was restarted in 2019 to head off a regional recession.
Thursday’s decisions are the first test of the central bank’s updated forward guidance. In July, policymakers said they were willing to overlook short-term jumps in inflation and would raise interest rates only once it was clear that the annual inflation rate would reach 2 percent “well ahead” of the end of the central bank’s projection horizon and stay around that level over the medium term.
The central bank slightly increased its inflation forecasts for the next few years from three months ago, but the upgrade still showed inflation below the target in the medium term. Annual inflation is predicted to be 2.2 percent in 2021, 1.7 percent in 2022 and 1.5 percent in 2023.
This strengthens the central bank’s case for keeping policy looser for longer even though inflation rose to 3 percent in August, the highest in nearly 10 years, the region’s statistics agency said last week. Policymakers have been betting that the jump in inflation will be temporary, as have other central banks around the world.
The European Central Bank as a whole has been more cautious than the Federal Reserve and the Bank of England about preparing markets for a return to normal policy. While the eurozone economy is rebounding faster than expected — rising 2.2 percent in the second quarter from the first three months of the year — Ms. Lagarde has also highlighted the risks to the expansion. There is the uncertainty posed by the spread of the Delta variant of the coronavirus, which could further slow consumer spending, and there is the risk that supply chain disruptions could last longer than expected, resulting in wage increases and other price pressures. This would undermine the belief that most of the short-term increase in inflation will be temporary.
“There remains some way to go before the damage to the economy caused by the pandemic is overcome,” Ms. Lagarde said, noting that there are more than two million fewer people employed than before the crisis.
The central bank is expected to maintain its older bond purchase effort, under which the bank buys €20 billion in assets each month. Many analysts expect policymakers to increase the size of purchases to keep providing stimulus to the economy even after the immediate impact of the pandemic has passed.
Ms. Lagarde said that the governing council did not discuss what would happen to either purchase program next year and that it would be on the agenda for December’s meeting, when the next round of staff forecasts for the economy will be available.
The central bank “clearly remains data-dependent, and has kept all options open for December,” strategists at Rabobank wrote in a note. “The bank is still a long way from ending asset purchases altogether.” The older bond-buying program and other policy tools will “take over the reins in pursuit of the inflation goal,” they wrote.