Taper without a taper: ECB edition
What to expect going into the ECB policy decision today?
There is only going to be one key thing to watch in the ECB decision today and that is whether or not the central bank will be reducing the pace of its PEPP purchases.
At its current pace, they are buying €80 billion per month and if they are to reduce said purchases, it is expected that we will see something around €60-70 billion per month going into Q4 with some scope to reduce further next year.
While the optics of that may seem hawkish given that some policymakers want pandemic support to be removed amid inflation risks, let's not forget that the ECB is also engaged in a wider APP of roughly €20 billion per month even before COVID-19 struck.
For now, policymakers may still get away with convincing the market of a more positive economic backdrop after the summer buzz but even then, it is going to be a close call today as to whether we will see a reduction in PEPP purchases through to year-end.
And if you take a step back and look at the bigger picture, it hardly makes much of a difference as the APP will still run beyond the expiry of PEPP in March next year.
Adding the likelihood that the ECB is not going to abandon its accommodative monetary policy stance, more subdued inflation forecasts looking towards 2022 and 2023 just means that the ECB is likely to step up APP support once PEPP runs in course.
That is to keep financing conditions more favourable and if the APP is upsized to something around €60-80 billion per month, it largely diminishes the impact from any taper set out by the PEPP today or in Q4 this year.
In short, a taper call today may see a reduction in bond purchases in the short-term but it isn't going to signal any meaningful end to bond buying as a whole for the ECB.
So, what exactly can we expect from the ECB later today?
It's a close call between a taper without actually tapering or basically no taper and a continuation of bond purchases indefinitely. Essentially, they are basically the same but it is all about the optics when it comes to central bank decisions these days.