ECB acts to avert ‘brutal transition' in exiting crisis mode

The European Central Bank temporarily boosted regular monthly bond buying for half a year to smooth the exit from pandemic stimulus as President Christine Lagarde unveiled forecasts showing a strong economic rebound along with an outlook for faster inflation.

In a statement that acknowledged the developing threat of the omicron variant, the ECB pledged to briefly double asset purchases to cushion the end of its €1.85 trillion ($2.1 trillion) emergency program in March and avoid what Ms. Lagarde called "a brutal transition." Officials will also revamp that crisis tool to combat future market turmoil.

"The progress on economic recovery and toward our medium-term inflation target permits a step-by-step reduction in the pace of our asset purchases," Ms. Lagarde told reporters Thursday in a virtual press conference in Frankfurt. "Inflation is expected to remain elevated in the near term, but we expect it to decline in the course of next year."

The so-called Asset Purchase Program will double to €40 billion a month, starting in the second quarter, tapering to €30 billion before returning to the existing pace of €20 billion euros in October. ECB officials also changed reinvestment rules around PEPP, making it easier to deploy support in the event of market jitters. Greece, which is excluded from regular bond purchases because of its low credit rating, may receive extra support under the plan.

The euro climbed as much as 0.6% to $1.1360, a two-week high, after Ms. Lagarde cited possible upside risks to the inflation outlook. But at the same time money markets pushed back bets on a first 10-basis-point rate hike into 2023 from next year.

The decision is an acknowledgment that emergency policy settings must come to an end in the face of the eurozone's fastest inflation since the single currency was created and as economic output nears pre-crisis levels. It also accounts for heightened uncertainty triggered by the resurgent pandemic, which has halted economic growth in Germany.

The ECB president unveiled updated economic forecasts that put inflation above the 2% goal for most of 2022, averaging 3.2%. Officials then see price growth below-target in 2023 and 2024, at 1.8% in each year. Ms. Lagarde said much of the current surge is driven by high energy prices and constrained supply, which should pass eventually.

Policymakers signaled they can reactivate the pandemic tool if needed to combat the sort of crisis whose eruption in the eurozone last year forced them to create it in the first place.

"Flexibility will remain an element of monetary policy whenever threats to monetary-policy transmission jeopardize the attainment of price stability," Ms. Lagarde said. "Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic."

The ECB's announcement follows Wednesday's decision by the U.S. Federal Reserve to double the pace at which it tapers its own stimulus as it grapples with the biggest surge in consumer prices in three decades. The Bank of England was even more proactive on Thursday, unexpectedly becoming the first Group of Seven central bank to raise interest rates since the pandemic struck, increasing rates by 15 basis points to 0.25%.

"Relative to the Fed's dramatic pivot yesterday and the Bank of England's rate hike today, the European Central Bank remains in the slow lane," according to Berenberg economist Holger Schmieding.

Unlike the Fed, the ECB hasn't abandoned its insistence that elevated price gains are transitory — driven by supply jams and soaring energy costs that will fade in 2022. Backing that view, IHS Markit said German inflation "might have peaked" as its latest gauge of activity showed Europe's biggest economy stagnating in December.

"Monetary accommodation is still needed for inflation to stabilize at our 2% inflation target over the medium term," Ms. Lagarde said. "In view of the current uncertainty, we need to maintain flexibility and optionality."