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ECB: Asset purchases to decline slowly

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In the week full of central banks, the statements of the European Central Bank will not have an impact outside the expected ground. While concerns about the Omicron variant do not suggest a rapid tightening cycle, inflation risks suggest the opposite. In this context, considering that we are at a very early stage in terms of rate hikes, we can expect the ECB to delay this move until 2023 or 2024. However, the ECB is expected to provide more clarity on pandemic asset purchases that will expire in March 2022.

 

If we were to detail the strategic adjustment we introduced in the Macro Perspective on the ECB; There will be less net asset purchases, but the initial reduction will be within the Pandemic Emergency Purchase Program (PEPP), and the ECB may take action to temporarily expand the Asset Purchase Program (APP) against economic risks. Because the emergence of the omicron variant of Covid-19 has increased the uncertainty. Therefore, we will see that the reductions within the APP are mainly postponed to the later stages of the new year. Lagarde does not see a rate hike in 2022 as possible. Net purchases under PEPP will also end in March. Here, the ECB, which will follow the path of tapering in the net, may follow a softer ground and increase its monthly bond purchases through the APP in a phase like April. We probably won’t get an exact figure on that this week, as the ECB will first want to learn more about the omicron and determine the conditions. Therefore, we do not expect a firm figure commitment at this stage on the expansion of purchases within the APP. As for the termination of PEPP, no steps will be taken and asset purchases will be reduced gradually in total. The duration of targeted long-term refinancing operations (TLTROs) will likely be extended.

 

Asset purchases within the scope of ECB APP and PEPP, general trend and projection… Source: Bloomberg

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The economic projections of the ECB can actually give clear information about perspective. Projections from sources close to the subject, although unofficial, suggest that long-term inflation expectations will likely be 2% below the target. Short-term inflation forecasts, on the other hand, will be volatile, possibly within a significant band gap of 2%, and will be revised upwards significantly. In fact, the picture presented is based on the expectation that inflation will be very high in the short term and decrease in the medium and long term. On GDP, revisions will be less important at this stage as the economy continues to grow.

 

As a result; The rise in inflation will be a sufficient criterion for the ECB’s adjustment to possibly buy fewer assets. The transformation of the policy will take place slowly and gradually, as the re-radiation of Covid cases involves the risk of economic activity. Within the scope of Pandemic Emergency Purchase, we expect bond purchases to be terminated at the planned stage, and to purchase more assets within the scope of APP for a few months against the dilemma of slowing economic growth and accelerating inflation. We can consider these additional APP purchases to be within 2Q22, preferably around April. More broadly, we expect a gradual reduction in the ECB’s total bond purchases until 2022, and we do not anticipate a complete shutdown of asset purchases before December next year.

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