ECB finally checks in with reality - ING

Carsten Brzeski, the Global Head of Macro for ING Research, discusses the outcomes of today's meeting of the European central Bank (ECB).

"The only tangible change at today’s ECB meeting was an end to the front-loading of asset purchases under the Pandemic Emergency Purchase Programme or, as ECB President Christine Lagarde called it, ‘a recalibration’. Instead of the ‘significantly higher pace’ of purchases than at the start of the year, the ECB will now conduct the purchases at ‘a moderately lower pace than in the previous two quarters’. As latest figures had shown that the ECB had already bought less (around 65bn euro) in recent months, today’s announcement is probably more about catching up with reality than any sign of coming tapering. What a ‘moderately lower pace’ will actually mean in practice remains unclear. "

"The press conference today brought, in our view, interesting insights; namely a very subtle but clear shift from the ECB on inflation. In our view, they are preparing the ground for a grand recalibration between the PEPP and Asset Purchase Programme next year."

"The ECB’s growth projections did not deliver any big changes. On the back of a stronger second quarter number, the ECB revised upwards GDP growth for this year to 5%, from 4.6%  in June. For 2022 and 2023, the ECB expects eurozone GDP growth to come in at 4.6% and 2.1%. Regarding inflation, the ECB expects headline inflation to come in at 2.2% in 2021, 1.7% in 2022 and 1.5% in 2023, from 1.9%, 1.5% and 1.4%, respectively. An upward revision across the board."

"The upward revision to the ECB’s inflation projections over the entire forecast horizon illustrates that the Bank has started to think differently about inflation. While Lagarde first stressed that higher inflation was still mainly temporary and transitory, she concluded that underlying inflation pressures had edged up. Moreover, contrary to the July meeting, Lagarde pointed out that price pressure could be more persistent than previously thought."

"What's also new in the ECB’s communication is that asset purchases are no longer only conditional on financing conditions and in turn their impact on inflation but now equally important in both financing conditions and the ECB’s inflation outlook."

"All in all, today’s meeting can be best summarised as the ECB finally catching up with reality, on asset purchases and more importantly on inflation. ECB watchers can take a break in October. It's the December meeting which will be the mother of all ECB meetings."