ECB contemplated life after emergency support at September policy meeting

European Central Bank policymakers debated a bigger cut in asset purchases last month and even contemplated life after the bank’s emergency support ends next year, the accounts of their Sept. 9 meeting showed on Thursday.

With the economy now on a solid footing as the pandemic recedes, the ECB is preparing for a key debate in December on winding down support and whether to ramp up other stimulus measures to pick up the slack.

In its first albeit token move to end pandemic-related stimulus, the ECB decided last month to “moderately” cut bond purchases. But some policymakers made the case for a bigger reduction, arguing that the central bank’s response was out of sync with the recovery.

“It was argued that a symmetric application of the (Pandemic Emergency Purchase Programme) framework would call for a more substantial reduction in the pace of purchases,” the ECB said. “From this perspective, a pace of purchases similar to the level prevailing at the beginning of the year would be appropriate.”

Some policy hawks went even further, arguing that markets had already prepared for the end of emergency purchases without a significant impact on financing conditions, so investors were well-prepared.

“The argument was made that markets were already expecting an end to net asset purchases under the PEPP by March 2022,” the accounts showed. “The point was made that, even without the PEPP, the overall monetary policy stance remained highly accommodative.”

In the end, the ECB opted for a more cautious move, fearing that a bigger stimulus cut could be seen as a step towards exiting its easy monetary policy, a premature move given weak inflation prospects over the medium term.

Regarding inflation, the accounts showed only modest concerns about the recent spike in prices, with policymakers calling this a temporary development that will fade next year.

While ECB chief Christine Lagarde played down inflation fears after the policy meeting, views appear to have shifted since, with a growing number of policymakers acknowledging the risk that supply bottlenecks and energy price rises could lead to a longer and bigger price shock.

Inflation jumped to a 13-year-high of 3.4% last month and could still hit 4% this year, leading to fears that the surge could be long enough to affect pricing behaviour and wage demands, resulting in a more permanent upward shift in the path of prices.

But the accounts showed only a few had such concerns, with policymakers contemplating if their projection models were working properly given the big inflation overshoots this year.

“This raised doubts about how well the models relied on in the projections were able to capture what was currently happening in the economy, the structural changes implied by the pandemic and the impact of the ECB’s new monetary policy strategy,” the ECB said.