By William Watts
Questions about how long and how fast the European Central Bank will keep conducting the bond purchases at the heart of its aggressively easy monetary policy stance were front and center Thursday following a steady-as-she-goes meeting of policy makers.
ECB President Christine Lagarde said the Governing Council didn’t discuss phasing out its massive pandemic emergency purchase program, saying such a move would be “simply premature.” The focus on a potential tapering of the program, which has 1.85 trillion euros ($1.22 trillion) in firepower, came after some ECB officials had signaled the potential to begin winding down the program next quarter.
The ECB, following its previous Governing Council meeting in March, announced it would conduct PEPP purchases at a “significantly higher pace” over the second quarter. Some analysts have deemed the ECB’s purchases so far as disappointing, with a pickup in gross purchases offset by increased redemptions.
Lagarde urged observers not to focus too much on weekly data, though economist Jack-Allen Reynolds of Capital Economics said that weekly measures do show a pickup. Excluding data from the first few weeks of January and in the week leading up to Easter, which were both periods when purchases were low for seasonal reasons, he sees net weekly PEPP purchases rising from an average of €14.4 billion to €18.3 billion, he said, but noted “that clearly is less than investors had anticipated, which helps to explain why bond yields have risen since the March meeting.”
The euro /zigman2/quotes/210561242/realtime/sampled EURUSD -0.0166% , meanwhile, was largely unfazed, edging down 0.1% to $1.2018. The euro is up 2.5% versus the dollar so far this month as a broader dollar rebound in the first quarter lost steam. Lagarde, asked about the euro’s level, emphasized that the ECB doesn’t target the exchange rate but does follow it closely as it’s movements affect the inflation outlook.
A stronger euro weighs on prices, making it more difficult to achieve the ECB’s target for inflation at near but just below 2%. Lagarde’s remarks signaled no urgent worries over the level of the currency, analysts said.
“We see little risk of the ECB standing in the way of a more sustained EURUSD move higher,” said Adam Pickett, currency strategist at Citibank, in a note.
Pickett said Citibank is more “emboldened” on its structurally bearish view of the dollar for a number of reasons, while also being encouraged by the improved vaccine rollout in Europe, continued value rotation flows into European equities and growing potential for fiscal stimulus in Germany.