Fundamental Updates – It’s Recalibration, Not Tapering (10 September 2021)

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 SEP 10, 2021

The ECB’s decision.

The European Central Bank (ECB) held its interest rates unchanged during their monetary policy meeting yesterday.

• Main Refinancing Operations Rate: 0.00%
• Marginal Lending Facility Rate: 0.25%
• Deposit Facility Rate: -0.50%

The size of its quantitative easing (QE) programmes remains unchanged as well.

• Asset Purchase Programme (APP): €20 billion per month
• Pandemic Emergency Purchase Programme (PEPP): €1,850 billion in total

On top of that, the central bank has opted for a reduction of pace in its assets purchase under the PEPP but did not provide more details on the amount. At the moment, €80 billion worth of assets are being purchased on a monthly basis.

It’s recalibration, not tapering.

Just when the market is trying to figure out from the monetary policy statement if the ECB has just carried out a QE tapering, the central bank’s President Christine Lagarde elucidated that the reduction of the pace is not a tapering, but a recalibration. The ECB’s decision “is to calibrate the pace of our purchases in order to deliver on our goal of favourable financing conditions”.

President Lagarde’s comment left the market wondering how significant is such an action carried out by the central bank going to have on QE if it is not considered as tapering. As a result, the euro was moving in an unclear direction.

Positive inflation projections.

Although the ECB’s action is likely going to spark some discussions over its ambiguity, one thing we know for sure is that the central bank is feeling confident in the recent rise in inflation in the eurozone. As released in the quarterly projection materials, overall inflation forecasts have been revised upwards.

Inflation Projections:

2021: revised upwards from previous 1.9% to 2.2%

2022: revised upwards from previous 1.5% to 1.7%

2023: revised upwards from previous 1.4% to 1.5%