Frederik Ducrozet & Nadia Gharbi, Pictet Wealth Management.
The ECB is on track to end its pandemic emergency purchase programme (PEPP) in March 2022 against the backdrop of broadening inflationary pressures. We forecast that PEPP purchases will be reduced to EUR50 bn per month in Q1 2022 before being wrapped up entirely in March. That will leave EUR100bn of the original EUR1,850bn PEPP allocation unused. Meanwhile, we expect the ECB to double its regular asset purchase programme (APP), to EUR40n per month from April 2002 on, but its commitment to open- ended QE is likely to weaken. We expect the ECB to review the pace of asset purchases every quarter, and to scale them back to EUR20bn per month by 2023.
In an alternative scenario, the ECB could launch a new “bridge” programme aimed at preventing an unwarranted widening in peripheral bond spreads. This could take the form of an envelope of around EUR200bn, including the EUR100bn left over from the PEPP, to be spent in a flexible way throughout 2022. We remain skeptical of this solution, if only because any unconditional QE programme targeting a single country may be too close to Yield Curve Control.
Either way, we forecast the ECB’s asset purchases to halve to EUR570bn in 2022, compared with EUR1,100bn in both 2020 and 2021. Net purchases of sovereign bonds would drop to EUR320bn in nominal terms, from EUR700bn in 2021, but this would still be enough to absorb the bulk of the net issuance of sovereign bonds in 2022. This is a feature, not a bug of ECB QE, in our view, as the ECB has become the effective backstop for fiscal policy. Other dimensions of ECB QE “flexibility” refer to capital keys as a guideline for asset purchases and the 33% issuer share limit on public debt holdings. We expect no change on either front. Our analysis suggests that the APP is flexible enough to cope with bond scarcity until at least the end of 2023. Greece could become eligible to the APP, and the share of supranational debt could be raised above 10% in 2022.
With the focus increasingly shifting to the possibility of rate hikes, the ECB needs to make sure that the recalibration of its asset purchases remains consistent with its forward guidance. We think that the easiest way to strengthen forward guidance is to keep the existing sequencing between QE tapering and the timing of lift-off. The ECB could drop “shortly” from its commitment to end the APP “shortly before” it starts raising rates, but we see no ECB rate hike before 2024.
Last but not least, the ECB seems to be leaning towards less generous targeted longer-term refinancing operations (TLTRO) in 2022, which may require some adjustments to the programme’s incentives and to the tiering multiplier.
Nothing is certain in life, not even ECB QE
The ECB will need to decide the future of asset purchases at the 16 December meeting of its Governing Council (GC). The GC meeting on 28 October will be all about paving the way for a December decision and pushing back against market pricing of early rate hikes.
