ECB to slow PEPP purchases 'moderately'

Rate-setters in Frankfurt decided to lower bond purchases under their emergency asset buying programme "moderately" but kept all the other main policy levers unchanged, including the size of the bond buying programme not linked to the pandemic.

In its policy announcement, the European Central bank said that favourable financing conditions could now be maintained with a "moderately" lower pace of purchases under the Pandemic Emergency Purchase Programme than in the prior two quarters.

It did not specify for how long that lower pace would apply nor whether it would be closer to the €60bn per month clip observed in the first three months of the year or the €80bn pace more recently observed.

However, the size of the total envelope for PEPP was kept at €1.85trn and with purchases still set to run until at least the end of March 2022 "and, in any case, until it judges that the coronavirus crisis phase is over."

Commenting on the latter, and heading into ECB chief, Christine Lagarde's press conference at 1330 BST, analysts at TD Securities said: "The risk during the press conference is that she doesn't push back hard enough on press questions that interpret the slowdown in PEPP purchases as a formal tapering in QE."

They also noted that the fresh economic forecasts from ECB staff due out on Thursday were "likely to point to significantly higher inflation in the near-term, with minor changes in the growth forecast."

Their expectation was that the ECB's governing council would likely keep its risk assessment as "balanced".

As of 1329 BST, the yield on the benchmark 10-year bund was drifting lower by roughly one basis point to -0.34% while euro/dollar was on the front foot, adding 0.14% to 1.1832.

The ECB kept its interest rates on the main refinancing operations, marginal lending facility and deposit facility at 0.0%, 0.25% and -0.50%, respectively.

Net asset purchases under the Asset Purchase Programme would also continue at a monthly pace of €20bn, the ECB said and run for "as long as necessary".

The governing council also maintained its targeted longer-term refinancing operations (TLTRO III).

"The 'calibrate, not taper' narrative gave us deja-vu of the December 2016 press conference. Further TLTRO operations will be discussed alongside the general stance at the December meeting, but will be data dependent," said analysts at Danske Bank.

They also noted Lagarde's confirmation during the presser that, as ECB chief economist Philip Lane had pointed out in the past, the APP should not be judged in isolation of the net supply in issuance.

"Overall, we largely share the ECB’s cautiously optimistic outlook for the economy and transitory inflation narrative."