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The ECB is aligning with the Fed in a double act to keep the stimulus flowing

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(Bloomberg) – Policymakers at the European Central Bank have all the evidence they need to keep their monetary stimulus ultra-flexible when they meet on Thursday, thanks in part to their opposing numbers at the Federal Reserve.

Despite a faster economic rebound from the pandemic in the United States and much higher inflation than in the euro zone, Fed officials have signaled that they will not slow down bond buying of their own accord a week later. Your reasoning? They still cannot be sure that the recovery is entrenched enough to be self-sustaining.

That’s a useful guide for the ECB, whose economy is further lagging and could dispense with the turbulence of global policy changes. The euro zone started vaccinations later and is just emerging from a double-dip recession. Vaccination targets are months away from being met and new virus variants threaten to restrict travel.

“Recent signals from the Fed are likely to help the ECB,” said Gilles Moec, chief economist at AXA Investment Managers. “I’m not expecting fireworks on Thursday, I don’t think they want to rock the boat.”

In fact, it seems unlikely that ECB officials will come as a surprise with the stimulus. Moderate lawmakers, like Executive Board member Fabio Panetta, say there is no reason to slow down the pace of buying pandemic bonds of around 20 billion euros ($ 24 billion) a week.


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More aggressive colleagues such as Bundesbank President Jens Weidmann have been largely silent on the issue, while President Christine Lagarde insists the ECB will maintain favorable funding conditions well into the economic recovery.

What Bloomberg Economics Says …

“It seems that this is not the time for the hawks to argue about buying more bonds. Bloomberg Economics expects policymakers to opt for another three months of “significantly higher” purchases through the Pandemic Emergency Purchase Program. “

-David Powell. For the full report, click here.

The last Fed official to speak before a period of silence leading up to the meeting was Loretta Mester on Friday, who said “we want to be deliberately patient here because, you know, this was a huge blow to the economy.” New York Fed Chairman John Williams said he would go no further than “talk talk” about where the economy is headed.

The differences with the euro zone are striking. US inflation could rise to 4.7% when May data is released on Thursday, coincidentally just as Lagarde begins his press conference. The OECD says the economy will grow 6.9% this year, outpacing its size before the pandemic.

Euro area inflation stands at 2%, slightly above the ECB’s target, and gross domestic product is forecast to grow by 4.3%, reaching just the pre-crisis level next year.

Uncertainty about the outlook intensified on Friday after weaker-than-expected US payroll figures. Both central banks say skyrocketing inflation will decline as energy prices stabilize and shortages that have hit businesses diminish.


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“I don’t think inflation and wage pressures will increase substantially,” said Holger Schmieding, Berenberg’s chief economist. “In the United States, the risk is higher, but even there I don’t see wage inflation taking on a life of its own.”

Investors are not predicting that either central bank will cut bond purchases until September at the earliest and will not raise interest rates until at least 2023.

Echoes of that restraint can also be seen in the Bank of Japan and the Reserve Bank of India, while the People’s Bank of China says it will not make abrupt policy changes.

However, some smaller economies are acting against inflation. Officials from New Zealand and South Korea have pointed to possible interest rate hikes and Canada has pointed to a reduction in debt purchases. Norway may raise rates in a few months, Iceland has already done so, and emerging economies Russia and Brazil have started to adjust as well.

Global divergence

“A clear divergence is opening up,” said Mansoor Mohi-Uddin, chief economist at Bank of Singapore Ltd. “The Fed will only take time to reduce its asset purchases, while the ECB and BOJ are also keen to maintain monetary conditions. relaxed during the pandemic. “

Fiscal stimulus can help determine any tipping points. This year’s $ 1.9 trillion package from US President Joe Biden gave a massive boost by sending checks home, but the sugar rush may already be fading. A follow-up package for infrastructure is bogged down in congressional talks.


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Treasury Secretary Janet Yellen wants Biden to go ahead and told Bloomberg News on Sunday that somewhat higher inflation would be welcome because it would allow interest rates to rise.

Read more: Yellen says higher interest rates would be ‘more’ for the US and the Fed

The European Union has had national support, such as loan and license guarantees that have kept companies afloat and workers in their jobs. It is also betting on a recovery fund of 800,000 million euros to strengthen the resilience of the economy in the long term.

But for the ECB, it is still unclear how many companies will fail and how many jobs will be lost when current support programs end and divestments from the recovery fund have not even started. Meanwhile, avoiding a decrease in stimulus on both sides of the Atlantic avoids the prospect of an economic shock.

“The risk of disrupting the market will be lower, with less contagion effects for the euro,” said Moec de Axa. “It puts the ECB in a more secure environment.”

© 2021 Bloomberg LP


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