The European Central Bank decided to have its QE and eat it too, slowing the pace of its purchase program without decreasing the overall amount, to ensure the reduction is technically not a “taper”.
ECB Interest Rate Decision September 2021
The Bank left interest rates unchanged. It would have been a very major surprise if they had made a change. The rate has remained unchanged for a long time and currently sits at an historic low. It is anticipated that rates will remain at this low for a long time to come, certainly throughout 2022.
ECB PEPP Decision September 2021
In recent months, major central banks around the world have been talking about reducing the pace and amount of “QE” (quantitative easing), sending signals of a desire to begin “tapering”, meaning slowly turning off the free money tap that is artificially boosting stocks. The ECB has announced something along the lines of tapering which is not quite tapering: reducing the pace, but not the allocated total, of the Pandemic Emergency Purchase Programme (PEPP), stating that “favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the previous two quarters”.
It is a stretch to call this a slight hawkish tilt, but it is arguably effectively a minor reduction in quantitative easing. Some analysts have called this a “first meaningful step towards tapering”. It is clear the ECB believes the economy and markets can continue at present on a somewhat lower level of support.
The ECB will be keen to ensure that it does not tighten monetary policy too rapidly, as it is widely seen to have done in 2011.
ECB on Inflation and GDP September 2021
The ECB raised its forecasts for both economic growth and inflation. The CPI (inflation) rate is expected to climb in annualized terms from its current expected rate of 1.9% for the year to 2.2% but is then expected to fall quickly to 1.7% over 2022 and 1.5% in 2023. The current rise in inflation is seen by the ECB as a temporary phenomenon.
Forecasted GDP has been increased from 4.6% to 5.0% by the end of 2021 but has been adjusted very slightly downwards from 4.7% to 4.6% for the end of 2022.
What Does This Mean for Traders?
Today’s release by the ECB contains no big surprises and there was nothing dramatic at the press conference following the release, except for Cristine Lagarde’s paraphrasing of a well-known Margaret Thatcher quote from the 80s. M. Lagarde pointed to the future development of the coronavirus pandemic as the main factor which may cause the forecasts to turn out as over or underestimations.
Two hours after the policy release, the benchmark EUR/USD currency pair was almost unchanged in value, with the price trading within the range made earlier in the day. There was a little more action in EUR/JPY which broke to new lows, but that move seems to have been caused more by a strengthening Japanese yen than a weaker euro. This suggests strongly that the market has already priced in the Bank’s input, so traders should feel free to proceed with whatever plans they might already have to trade EUR currency pairs and crosses.