ECB plots stimulus exit as inflation looms

European Central Bank policymakers will gather on Thursday (16 December) for a crunch meeting, as soaring inflation heaps pressure on the bank to wind down its stimulus just as a new coronavirus variant threatens to derail the recovery.

The Frankfurt-based institution is expected to confirm the planned end of its massive pandemic-era stimulus plan in March, currently hoovering up around €70 billion worth of assets every month.

The €1.85 trillion pandemic emergency bond-buying programme (PEPP) is the ECB’s main crisis-fighting tool, aimed at keeping borrowing costs low to stoke economic growth.

The challenge for the ECB’s 25-member governing council is finding a way to smooth the transition to avoid upsetting markets or jeopardising the eurozone’s fragile rebound from the initial coronavirus shock.

Boosting the bank’s pre-pandemic asset purchase programme (APP), currently running at €20 billion a month, or creating a new envelope for financial support through 2022 and beyond are two of the options discussed by observers.

The ECB will want to avoid a “cliff-effect” in asset purchases and would settle on an overall rate “between €40 and €60 billion” in the second quarter next year, said Konstantin Veit, portfolio manager at Pimco.

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