The European Central Bank’s first policy meeting of 2021 was largely a sleepy affair, with policy makers moving into wait-and-see mode after bolstering stimulus efforts last month, though one modest tweak to its policy statement raised some eyebrows on Thursday.
“If favorable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon of the PEPP, the envelope need not be used in full,” the ECB said, referring to its 1.85 trillion euro pandemic emergency purchasing program, which it repeated is set to run through at least the end of March 2022. The ECB last month expanded the PEPP envelope from 1.35 trillion euros and extended its duration from the end of June.
At the same time, the ECB said the envelope “can be recalibrated if required to maintain favorable financing conditions to help counter the negative pandemic shock to the path of inflation. ”
While the statement indicated the ECB could go either larger or smaller than currently outlined, analysts read the added language as a slight nod to policy hawks.
“This is the first time that we see specific reference, in the official communication announcing policy changes, to the idea that the PEPP might not be used in full,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, in a note.
Vistesen described the added language as a “slight hawkish tilt in the communication, and also one which could become a target for markets.
“ After all, the ECB is now saying that if yields remain as low as they are now, there isn’t a reason to deploy the PEPP in full. We wouldn’t put it past markets to test the central bank on this,” he said, while noting that the position is balanced by the prospect that the ECB could further boost the size of the program if conditions warrant it.
The euro EURUSD maintained a gain versus the dollar after hitting a session high after the policy statement. The shared currency remained up 0.5% at $1.2164.
Others argued that the additional language was in line with what ECB officials have been signaling, and shouldn’t be seen as much of a surprise:
Indeed, while the language was new to the policy statement, the exact same text was used in Lagarde’s introductory statement at her news conference in December, noted Carsten Brzeski, global head of macro at ING, in a note. Putting the language in the policy decision “gives it somewhat more importance,” he said.
ECB President Christine Lagarde, in her news conference, was peppered with questions seeking details on exactly how policy makers would go about gauging “favorable financing conditions” and how that would be used to calculate how much of the PEPP is ultimately used.
Lagarde, in response, frequently referred back to the language in the policy statement and pushed back on the suggestion that she needed to offer a more detailed road map to how the ECB would react to changes in financial conditions.
Lagarde said the assessment of financing conditions wouldn’t be driven by a single indicator. The ECB would instead take a “holistic” approach, incorporating bank lending, credit conditions, and government and corporate bond yields.
The bottom line is that the ECB is keeping all its options open and for now is happy to remain on the sidelines, Brzeski said. “As boring as this might sound, it probably was the best thing to do,” he said.