Market Extra: ‘The lady isn’t tapering,’ says Lagarde as ECB slows asset purchases

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European Central Bank President Christine Lagarde argued Thursday that a decision to slow the pace of asset buying under the institution’s pandemic emergency program didn’t amount to a “tapering,” but was instead a mere recalibration of stimulus efforts.

“The lady isn’t tapering,” Lagarde said at a news conference following the ECB decision, seemingly echoing late U.K. Prime Minister Margaret Thatcher’s 1980 declaration, in response to pressure to reverse her economic policies, that “the lady is not for turning.”

Lagarde said the ECB was merely recalibrating the PEPP, under which the bank had accelerated purchases over the past six months in response to a sluggish economic outlook. The “rebound” phase of the economic recovery now appears increasingly advanced, she said, though a “full” recovery could yet be delayed by the spread of the delta variant of the coronavirus that causes COVID-19.

In a statement earlier Thursday, the ECB said that the Governing Council had decided, based on a joint assessment of financing conditions and the inflation outlook, that “that favorable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters.”

Lagarde said the decision to moderate the pace was unanimous.

At the same time, net purchases under the ECB’s separate asset purchase program are set to continue at a monthly pace of €20 billion ($23.7 billion), the ECB said. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates, the ECB said. PEPP purchases, meanwhile, will continue until at least the end of March 2022, the central bank said, with a total envelope of €1.85 trillion.

“While today’s policy statement confirms that the ECB will reduce the pace of its asset purchases slightly compared to its average since March, this is a long way from being a ‘full taper,’” said Andrew Kenningham, chief Europe economist at Capital Economics, in a note.

“Total asset purchases will probably continue at an average monthly rate of around €90 billion per month in the coming quarter, there is still no firm end-date for the emergency purchase program and, for now, the ECB still plans to continue with the standard APP until shortly before it raises interest rates,” he said.

The move wasn’t unexpected, but it was still significant.

“The ECB has taken its first meaningful step towards tapering today,” said Seema Shah, chief strategist at Principal Global Investors. “Characteristically, it hasn’t tied itself to a specific pace of purchase, instead retaining an element of flexibility which will be helpful in the face of a potential tightening in financial conditions as Fed taper draws near.”

Lagarde “stuck to the script,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, in a note. “The ‘moderately slower pace’ of PEPP in Q4 is a recalibration, not a taper, a distinction presumably used to avoid the perception that the central bank is on track to reduce the pace of [quantitative easing] to zero.”

Meanwhile, Lagarde largely brushed aside questions around the ultimate fate of the PEPP. It appears likely policy makers will face a decision on whether to announce the wind-down of the program at the ECB’s December policy meeting, which will feature the next quarterly update of staff macroeconomic forecasts, Vistesen said.

ECB staff on Thursday raised their forecasts for near-term eurozone growth and inflation. They expect gross domestic product to grow by 5% in 2021, up from a previous forecast of 4.6% in June. Inflation is expected to hit 2.2% in 2021, but soon fall back below the bank’s symmetric medium-term target of 2%.

As expected, the ECB also left interest rates unchanged, with its deposit rate at negative 0.5%. while the main refinancing rate remains at 0%.

The euro

gave up early gains to edge down 0.1% versus the U.S. dollar, trading at $1.1811. The yield on the 10-year German government bond
or bund, was down 3.9 basis points at negative 0.359%. Yields move in the opposite direction of bond prices.

European equities turned higher as U.S. equities rallied, with the Stoxx Europe 600

up 0.3%.