At its meeting today, the ECB’s governing council decided to end net bond purchases under the pandemic emergency purchase program (PEPP) by March 2022. Meanwhile, the current low level of key interest rates remains unchanged. Jan Krahnen, Director of the Leibniz Institute for Financial Research SAFE, comments on this decision as follows:
“With today’s decision, the ECB is trying to base the formation of expectations not on a short-term assessment, but a longer-term trend. The gradual throttling of the pace of bond purchases up to the discontinuation of the PEPP next year marks the beginning of a policy turnaround, which the ECB has previously prepared in terms of communication. At the same time, the ECB is not allowing itself to be restricted in its freedom of action and is making it clear that it is leaving all flexibility open for bond purchases in the coming months, not least concerning Greek government bonds.
Successively reducing bond holdings while retaining full freedom of action in all securities will probably lead to interest rate effects at the long end. By contrast, there will probably be little change at the short end, not least because bank refinancing will remain at the current low level. The ECB’s intention here is obviously to steer expectations as cautiously as possible: in the direction of reducing the bond holdings on the ECB’s balance sheet. It is then still a long way to interest rate hikes with their feared negative economic effects.”