Last Week, the European Central Bank (ECB) announced a plan to begin a tapering of their emergency bond purchases enacted in the aftermath of the global pandemic.
The ECB isn’t the first central bank to consider reining in stimulus—interest rate hikes are underway for an increasing number of countries.
Contrary to the fear that it’s payback time as a gradual slowing of record-breaking stimulus heralds a major drop for the world’s stock markets, the evidence suggests the potential for a positive outcome.
The European Central Bank (ECB) headed off the U.S. Federal Reserve (Fed) with their announcement to taper their emergency bond purchases enacted in the aftermath of the global pandemic. The Fed is probably not far behind; we anticipate a similar announcement likely to come later this year. But they aren’t the first central bank to consider reining in stimulus—interest rate hikes are underway in an increasing number of countries. It’s payback time as central banks around the world begin to reverse the measures enacted in response to the pandemic. For investors, the payback may lead to a payoff.
Last Thursday’s ECB policy statement upgraded the growth and inflation outlook for Europe. Responding to this positive news, it also announced a slow reduction in the pace of its asset purchases (QE) compared to its average since March of this year. This move qualifies as “taper-lite” (instead of a full taper) given that:
- Currently, there is no planned end to the Pandemic Emergency Purchase Program (PEPP)—those discussions are anticipated to take place in December. The total asset purchases for PEPP will probably continue at an average monthly rate of around 60-70 billion euros per month in the coming quarter (compared with 80-90 billion in recent months). Further reductions in purchases may be coming early next year, but there is no timeline to winding up the program, yet.
- The ECB still plans to continue its pre-pandemic Asset Purchase Program (APP) until shortly before it raises interest rates—meaning that even if they eventually phase out the PEPP program purchases of 65-70 billion euros per month sometime next year, the 20 billion euros per month under APP will go on (or potentially increase as needed).
The change in asset purchases is likely to make a negligible difference to overall financial conditions or equity markets. We expect more announcements at meetings in the coming quarters, as this was a very gradual start to the removal of stimulus which delivered the easiest financial conditions since the 2008-09 Great Financial Crisis.
Financial conditions easiest since pre-Great Financial Crisis