Today’s statement of monetary policy from the European Central Bank (ECB) showed the Governing Council making a subtle but important tweak to policy. The ECB has brought forward some of its bond-buying under its Pandemic Emergency Purchases Programme (PEPP). This should help to further support the euro in the near term.

  • The assets bought under the ECB’s PEPP will now be “conducted at a significantly higher pace” over “the next quarter” than the first months of the year.
  • In the ECB staff economic projections, growth was held all but the same, whilst inflation projections for 2021 have been significantly increased.
  • The euro is continuing to build support following the ECB decision

Font-loading PEPP purchases, not increasing the total

The total envelops of €1850bn of the ECB’s Pandemic Emergency Purchases Programme was unchanged and will continue at least up until at least March 2022. The ECB has been buying up around €60bn of assets per month. However, in response to the second wave lockdowns in early 2021, and sharply rising bond yields, the purchases will now be significantly increased in this current quarter. 


[Monetary policy decisions]

Purchases under will now be increased significantly. What does “significantly” mean? Christine Lagarde was keen to stress the flexibility of the purchases in her press conferences and did not want to be “bound by any specific number”.

This could though see the PEPP purchases increase from around €60bn per month towards €100bn.

ECB holds growth expectations flat, but inflation is jumping this year

The graphic from the ECB shows that growth projections remain broadly unchanged. A slight increase for 2021 GDP but a slight downward revision for 2022. The biggest change comes in inflation projections with 2021 HICP (the ECB’s preferred measure of inflation) is now expected to be +1.5%.

Much higher inflation this year, but the increase is not expected to be sustainable. years.


[ECB/Eurosystem staff macroeconomic projections]

Rising “market interest rates” need to be countered

ECB President Lagarde also spoke about market interest rates rising since the start of the year which could prove a risk and generate “premature tightening conditions”.

By “market interest rates”, she means government bond yields have risen. The ECB’s actions to significantly increase purchases are an attempt to try and keep a check on rising bond yields. Sharply rising bond yields across the Eurozone would risk choking off any economic recovery from the pandemic.

Buying more bonds helps to increase the price and reduce the yield (bond prices and yields always move in an opposite direction). Lower bond yields mean that borrowing rates are cheaper and more helpful for economic growth. 

How does this impact upon markets you are trading?

The reaction on the euro has been choppy since the announcement of the policy at 1245GMT and also during ECB President Lagarde’s press conference. The policy move was probably the minimum that the market could have hoped for, but also broadly expected.

EUR/USD has moved in a price range of around 30 pips since the decision, so not a significant reaction there.

Moving forward, this may help to stabilize the euro in the coming weeks. It should help to act as a buffer and protect EUR/USD from the significant further downside. Despite this, though we still see USD strengthening is likely which could pull EUR/USD lower towards 1.1600/1.1800.