The ECB has made the first tentative steps in a tightening cycle. No more front-loading of the PEPP asset purchases will be seen as a tiny victory for the hawks on the Governing Council. This also comes with upward revisions to both growth and inflation projections. However, there is much more that needs to be seen before decisive tightening can take place.

  • No changes to overall monetary policy
  • However, the pace of PEPP purchases has been altered to be “moderately slower” than the significantly higher pace of the last two quarters.
  • Inflation projections have been increased across the projection cycle but still not durable around the 2% target.

No overall change to ECB monetary policy

All monetary policy rates have been held steady, as fully expected:

  • Main refinancing rate held at 0.00%
  • Deposit rate stays at -0.50%

Overall asset purchases measures have also been maintained:

  • Asset Purchase Programme (APP) held at €20bn per month
  • Pandemic Emergency Purchases Programme (PEPP) total envelope maintained at €1,850bn and to run at least until the end of March 2022, or until the Governing Council judges the coronavirus phase to be over. 

However, ECB is slowing the pace of PEPP

The overall envelope of PEPP has been maintained but the pace of purchases will now be lower in Q4. In the past two quarters, the pace of the purchases under PEPP has been conducted at a significantly higher pace than the first months of 2021. This has now been changed to a “moderately lower pace” than the previous two quarters.  


This will be seen as a mildly less dovish stance taken from the ECB (it is probably a stretch to suggest this is a hawkish move) as it ends the front-loading of purchases. It also opens the potential for the PEPP program to end before all of the €1,850bn envelopes has been used. 

However, there was no clarification on what “moderately lower” means. Furthermore, given that inflation is still expected to be some way short target (see below), then policy conditions are expected to remain very loose beyond March 2022.

Upward revisions to economic projections, but still not enough

The ECB has revised higher its growth and inflation forecasts. 

  1. Growth – projections have been increased for 2021 to 5.0% (from 4.6% previously) but interestingly, there has been a slight shaving of the GDP projection for 2022.

ECB Growth

  1. Inflation – is expected to rise and the build-up of underlying price pressures should be “gradual”. 

The inflation forecasts have been increased throughout the projection cycle.

However, once through 2021, the medium-term inflation outlook is still not able to hold around the 2% target and then drops further between 2022/2023. This breaks two of the criteria that Lagarde and the ECB have laid out for tightening policy.


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This is likely to mean that whilst the Governing Council can reduce the pace of PEPP asset purchases and possibly even end the PEPP without the entire €1,850bn being used. However, with inflation still expected to be well below target in the medium term and beyond, loose monetary policy (asset purchases) can be expected to continue for some time to come and likely beyond the expected end of PEPP in March, in whatever new acronym they assign to it.

E is for “Emergency”

Another interesting point is that there has been some tongue-in-cheek discussion amongst market participants over what the “P” in PEPP means. Is it “Pandemic” or “permanent”? Today, there was a moment when Lagarde emphasized the word “Emergency”.

Whilst this is far too early to have the ECB exiting its seemingly perpetual accommodative asset purchases, but at least this hints that Lagarde has a preference that she would like to normalize monetary policy. 

Market Reaction

It is interesting to see the initial move on German Bund yields and the EUR has now been given back following the press conference.

  • EUR/USD is now c. -10 pips lower.
  • German 10-year Bund yield lower by c. -1 basis point.

This would suggest that any move driven by the less dovish reduction in PEPP purchases has been overtaken by the likelihood that asset purchases will continue for some time to come.


German Bund yield


The key monetary policy takeaway from the September ECB meeting are:

  • The slower pace of the PEPP purchases - into Q4 will be “moderately lower” than it has been in the previous two quarters.
  • Inflation projections increased but are still expected to drop back well below target over the medium-term horizon (i.e. in 2022 and beyond) 

This means that the ECB is slightly less dovish than it was previously but still nowhere near ready to move decisively along a path of tightening monetary policy.