ECB begins to taper QE

The ECB monetary policy decision for December shows the first real, but tentative steps along the road to tighter monetary policy. The ECB has kept interest rates steady but started to taper off its asset purchases.

Here is a summary of its moves:

  • Interest rates held steady, with the main refinancing rate at zero and the deposit rate at -0.50%. This was entirely expected by markets.
  • The Pandemic Emergency Purchases Programme (PEPP), the ECB’s response to the pandemic, will end in March 2022 (the end of Q1). Q1 2022 will be conducted “at a lower pace than previous quarters” (which have been around €80bn per month).
  • The Asset Purchases Programme (APP), the ECB’s pre-existing quantitative easing, will be increased in Q2 from €20bn per month to €40bn per month. In Q3 the purchases will be €30bn per month before resorting to €20bn per month in Q4.

Monthly asset purchases will be lower in Q1 than they are now and this taper is set to continue in Q2 and Q3 next year.

According to ECB President Lagarde, the ECB is intent to maintain “flexibility and optionality” to get inflation back towards the target. In the press conference, Lagarde noted that:

  • PEPP reinvestments (which will continue into 2024) can be shifted across countries and asset classes. 
  • PEPP purchases can also be resumed if there are negative shocks to the Eurozone economy from the pandemic. 
  • The Governing Council expects net purchases to end “shortly” before the ECB raises interest rates.

Of the staff projections, the growth outlook for 2022 has been cut slightly, but the trend of growth reduction has been shallowed, as 2023 has been increased.


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However, looking at the inflation projections, there is a significant increase in expectations. Inflation for 2022 is expected to be much higher above the 2% target, before reducing sharply in 2023 and again back below 2% but holding around 1.8%.


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What does this mean?

This suggests that the prospect of rate hikes in 2022 are still very unlikely. This is a very cautious first step on the path towards tighter monetary policy by the ECB. With inflation being much higher than previously thought, it would have been very difficult to justify blindly continuing with significant monthly asset purchases throughout 2022. 

Initial Market Reaction

The euro (EUR) has strengthened on this announcement. EUR/USD has moved higher towards a test of resistance between 1.1350/1.1385. If short term positive momentum continues, the pair may even be able to break through this resistance and open 1.1430/1.1465.


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However, we expect that any gains are likely to be short-term in nature. Once the dust settles on these central bank decisions (the Fed and ECB) we would expect EUR/USD to top out within the longer-term downtrend (at 1.1490 today) and fall away once more in the weeks ahead. We continue to expect a retest of the 1.1185 low over the medium term.