Saxo Bank: The European Central Bank's monetary policy is expected to remain stable, and the scale of bond purchases is expected to slow

On Wednesday (September 8), Saxo Bank issued a report, predicting that the European Central Bank Management Committee will not change the consensus on monetary policy this week. The overall financing conditions are still very loose. This will open the door to a slowdown in monthly purchases under the Emergency Procurement Program (PEPP) in the fourth quarter, from 80 billion euros per month to 60 billion euros per month, but this decline has little impact on the market. The bank also expects that in view of the positive economic momentum in the euro zone this summer, the European Central Bank will raise its economic expectations.

Minutes of the European Central Bank's July meeting confirm its optimism

The minutes of the ECB’s July meeting stated: “The risks to the outlook are generally balanced. Savings may decrease faster than expected, which means that there is some upside potential for the outlook.” From an economic point of view, the spread of delta variants Its influence on the Eurozone is limited. More than 70% of adults in the EU are now fully vaccinated. This is an important milestone. Saxo Bank analysts believe that the possibility of re-implementing travel or outbound restrictions this fall is very small. In view of the good economic momentum, the bank expects that the European Central Bank will raise its macroeconomic forecasts for this year and next.

Upside risks remain in the inflation outlook

This summer, the inflation rate in the euro zone has risen significantly. However, most members of the management committee may think that the latest high inflation data is temporary and mainly driven by one-off factors.

In July, the Eurozone Industrial Producer Price Index (PPI) rose 2.3%, higher than expected, and higher than the previous 1.4%. In August, the Eurozone CPI was estimated for the first time to climb to 3.0% from the previous 2.2%, which was much higher than the previous inflation target of the European Central Bank. This increase is mainly due to the increase in commodity prices and transportation costs, but most importantly, it is due to the base effect.

For example, the base effect was once a key factor in the distortion of French CPI. France's CPI fell to 1.9% in August. Last summer sales were in August. This is not the case this year, so manufacturing product prices have accelerated significantly (+1.3%).

Recent price changes tend to confirm the ECB's risk analysis. However, if energy and intermediate products continue to rise, the risk that producer price increases will be passed on to consumers is real. This will lead to a decline in consumer spending.

The European Central Bank is expected to slightly reduce the scale of PEPP purchases

At present, the overall financing conditions in Europe appear to be very loose. This is a good way to assess the overall financing situation of the Eurozone. This provided support for the positive economic momentum in the euro zone this summer, and supported calls for a slowdown in asset purchases in the fourth quarter. Saxo Bank predicts that the scale of asset purchases will slow from 80 billion euros per month to 60 billion euros per month.

This will be similar to the number from January to February 2020. Doves such as the chief economist of the European Central Bank Ryan may downplay the importance of this statement . The technical adjustment to the scale of PEPP purchases will have little impact on the market. It is too early to talk about exiting the plan.

Looking ahead, ECB hawks are expected to further promote the withdrawal of emergency monetary policy measures. Saxo Bank believes that discussions on PEPP will start earlier than previously expected in December or early next year. Unless the epidemic recovers in the next few months, it is unlikely that PEPP will be extended beyond March 2022.

At present, the European Central Bank has two options to withdraw from the debt purchase plan of the epidemic economy:

Introduce a temporary asset purchase program, which European Central Bank President Lagarde mentioned earlier this summer, or increase the monthly transaction volume of the Asset Purchase Program (APP). In addition, the European Central Bank is expected to be far away from raising interest rates. From an investor's point of view, the risk of raising interest rates is almost negligible.