Market Extra: ‘The lady isn’t tapering,’ says Lagarde as ECB slows asset purchases


European Central Bank President Christine Lagarde argued Thursday that a decision to slow the pace of asset buying under the institution’s pandemic emergency program didn’t amount to a “tapering,” but was instead a mere recalibration of stimulus efforts.

“The lady isn’t tapering,” Lagarde said at a news conference following the ECB decision, seemingly echoing late U.K. Prime Minister Margaret Thatcher’s 1980 declaration, in response to pressure to reverse her economic policies, that “the lady is not for turning.”

Lagarde said the ECB was merely recalibrating the PEPP, under which the bank had accelerated purchases over the past six months in response to a sluggish economic outlook. The “rebound” phase of the economic recovery now appears increasingly advanced, she said, though a “full” recovery could yet be delayed by the spread of the delta variant of the coronavirus that causes COVID-19.

In a statement earlier Thursday, the ECB said that the Governing Council had decided, based on a joint assessment of financing conditions and the inflation outlook, that “that favorable financing conditions can be maintained with a moderately lower pace of net asset purchases under the PEPP than in the previous two quarters.”

Lagarde said the decision to moderate the pace was unanimous.

At the same time, net purchases under the ECB’s separate asset purchase program are set to continue at a monthly pace of €20 billion ($23.7 billion), the ECB said. The Governing Council continues to expect monthly net asset purchases under the APP to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates, the ECB said. PEPP purchases, meanwhile, will continue until at least the end of March 2022, the central bank said, with a total envelope of €1.85 trillion.

“While today’s policy statement confirms that the ECB will reduce the pace of its asset purchases slightly compared to its average since March, this is a long way from being a ‘full taper,’” said Andrew Kenningham, chief Europe economist at Capital Economics, in a note.

“Total asset purchases will probably continue at an average monthly rate of around €90 billion per month in the coming quarter, there is still no firm end-date for the emergency purchase program and, for now, the ECB still plans to continue with the standard APP until shortly before it raises interest rates,” he said.

The move wasn’t unexpected, but was significant.

“The ECB has taken its first meaningful step towards tapering today,” said Seema Shah, chief strategist at Principal Global Investors. “Characteristically, it hasn’t tied itself to a specific pace of purchase, instead retaining an element of flexibility which will be helpful in the face of a potential tightening in financial conditions as Fed taper draws near.”

The ECB also left interest rates unchanged, with its deposit rate at negative 0.5%. while the main refinancing rate remains at 0%.

The euro

remained up slightly, holding a gain of 0.1% versus the U.S. dollar at $1.1826. The yield on the 10-year German government bond
or bund, was down 2.6 basis points at negative 0.346%. Yields move in the opposite direction of bond prices.

European equities were slightly lower, with the Stoxx Europe 600

down 0.1%.

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